In the era of artificial intelligence (AI), NVIDIA (NASDAQ:NVDA | NVDA Price Prediction) remains an unstoppable processor powerhouse and a darling of the stock market. With that, it certainly seems like any fund associated with NVIDIA must be massively profitable and absolutely fail-safe.
Addressing the demand for stock-specific exchange traded funds (ETFs), YieldMax offers a passive-income-generating fund for NVIDIA stock optimists. If you agree that NVIDIA will continue to book huge revenue and profits, then you may be tempted to YOLO your investment account into one particular YieldMax fund.
That fund invests in NVIDIA, but not directly and not in the way you might assume. You’ll surely be impressed with the advertised yield, but after discovering the drawbacks, you might wonder whether it’s all real or just an illusion.
No doubt about it: NVIDIA stock has rewarded its loyal investors with substantial share-price gains over the years. On the other hand, passive income collectors probably aren’t too impressed with NVIDIA’s meager 0.02% forward annual dividend yield.
To scratch the itch for big yield, you may consider the YieldMax NVDA Option Income Strategy ETF (NYSEARCA:NVDY). This YieldMax fund doesn’t directly hold NVIDIA shares, but it replicates share ownership through synthetic option strategies.
That’s fine, but be aware that the NVDY ETF subtracts 1.27% worth of annualized operating expenses from the share price. So already, you’ll be at a disadvantage when compared to simply holding NVIDIA stock shares, which don’t deduct operating expenses.
However, whereas NVIDIA stock only pays a 0.02% yield, the YieldMax NVDA Option Income Strategy ETF currently advertises a hefty 38.73% annual distribution rate (which is similar to a dividend yield). Knowing this, you might not mind paying the 1.27% in expenses for the YieldMax NVDA Option Income Strategy ETF.
You’ll certainly want to keep tabs on the advertised distribution yield of the NVDY ETF, though. This yield is subject to change at any time, so it could get cut tomorrow, next week, or next month.
On the positive side, the YieldMax NVDA Option Income Strategy ETF distributes cash payments on a weekly basis. This makes the fund even more alluring, yet we can’t just weigh the potential profits without taking the possible pitfalls into account.
Next, we need to consider how the YieldMax NVDA Option Income Strategy ETF manages to deliver such a high distribution rate. While the fund replicates NVIDIA share ownership through synthetic option strategies, it uses other strategies to extract weekly passive income.
Those income-producing strategies involve selling covered call options and/or call option spreads. While these strategies allow for consistent cash generation, they will also tend to limit the upside movement of the NVDY ETF.
If NVIDIA stock rockets higher — which does occur sometimes — NVIDIA’s direct shareholders can celebrate as their portfolio’s value increases. Meanwhile, due to the limiting effect of selling covered calls and spreads, the share price of the YieldMax NVDA Option Income Strategy ETF might only rise slightly or not at all.
In addition, whenever YieldMax pays out a cash distribution for the NVDY ETF, investors should expect the share price to decline by the amount of the distribution. This could lead to an uncomfortable share-price decline over the long run.
Here’s how this could impact someone’s overall profits in a real-life scenario. During the past 12 months, you could have simply held NVIDIA stock shares and realized a nice 35% profit. Those gains would have come from share-price appreciation, not the meager 0.02% dividend yield.
As for the YieldMax NVDA Option Income Strategy ETF, you might have enjoyed the weekly distributions during the past 12 months, but the share price would have declined by 33%. With that in mind, perhaps the NVDY ETF’s advertised distribution rate isn’t quite as alluring anymore.
We shouldn’t label the distribution yield of the YieldMax NVDA Option Income Strategy ETF as “fake” since the risks are declared in the fund’s prospectus. These risks include the operating expenses as well as the inherent limitations involved with selling covered call options and spreads.
Still, it’s important to weigh the likelihood of share-price erosion against the prospect of large weekly cash distributions from the NVDY ETF. Remember, those distributions could get cut at any time, and the fund’s option-trading strategies won’t just bring you free money without drawbacks.
That’s why a safety-first investor might simply choose to directly own NVIDIA stock shares instead of buying the YieldMax NVDA Option Income Strategy ETF. As an alternative, if you’ll accept some risk and share-price volatility, it may be acceptable to purchase just a few shares of the NVDY ETF.
