DIV 302Lesson 5 of 60 of 6
The Risks of Ultra High Yield ETFs
What can go wrong with funds yielding 30% or more, and a checklist before you buy one.
What you’ll learn
- The ten risks that come with funds yielding 30% or more
- Why volatility itself destroys value, even when the average return looks fine
- How much of a portfolio an ultra high yield fund can take before it does damage
- A checklist to run before buying any of them
A fund yielding 50% looks like a shortcut to financial freedom. Put $100,000 in and collect $50,000 a year. If only. Funds paying 30%, 50% or even 100% exist, and some people do well with them for a while, but the risks are large and mostly invisible in the monthly checks. Here they all are in one place.
The ten risks
| Risk | What it means for you |
|---|---|
| 1. NAV erosion | The share price tends to fall when payouts exceed what the strategy earns |
| 2. Capped upside | The best months of the underlying are handed to option buyers |
| 3. Full downside | A crash in the underlying hits almost in full |
| 4. Volatility drag | Big swings eat compound growth |
| 5. Concentration | Many depend on one stock, one sector or one theme |
| 6. Shrinking payouts | A percentage of a falling price is fewer dollars each time |
| 7. Fees | Often around 1% a year, plus trading costs |
| 8. Taxes | Mostly ordinary income or return of capital, not qualified dividends |
| 9. Fund risk | Small or new funds can change strategy, reverse split or close |
| 10. Behavior | Big checks tempt investors to oversize positions and ignore total return |
Volatility drag, up close
Most ultra high yield funds sell options on very volatile assets, because that’s where the premium is. But volatility itself is costly. Two investments with the same average return can end up worlds apart if one swings wildly:
Now add a cap: an option income fund keeps only part of each big up move but most of each down move. Volatility drag gets worse, not better. That’s a big part of why the single stock funds in Single Stock Option Income ETFs lost so much of their price.
How big a slice can a portfolio take?
Position size is the one risk you fully control. The widget splits $100,000 between a core dividend portfolio and an ultra high yield fund. Try 10%, then 50%, then 90%:
A small slice adds noticeable income early without wrecking the portfolio if the fund erodes. A large slice front-loads income, then leaves you with less money and less income than a balanced core. Many experienced income investors cap any single ultra high yield fund at a few percent, and all of them together at 10% to 20%.
Today’s ultra high yielders
| Ticker | Name | Forward yield | Trailing 12M yield | 1Y total return | 1Y price change |
|---|---|---|---|---|---|
| MSTY | YieldMax™ MSTR Option Income Strategy ETF | 96.61% | 136.71% | -46.7% | -77.3% |
| CONY | YieldMax™ COIN Option Income Strategy ETF | 67.11% | 124.95% | -43.6% | -73.5% |
| ULTY | YieldMax™ Ultra Option Income Strategy ETF | 58.98% | 92.52% | -5.9% | -52.6% |
| TSLY | YieldMax™ TSLA Option Income Strategy ETF | 52.87% | 80.63% | -4.2% | -45.8% |
| YMAX | YieldMax™ Universe Fund of Option Income ETFs | 40.47% | 61.15% | +0.4% | -39.8% |
| NVDY | YieldMax™ NVDA Option Income Strategy ETF | 34.75% | 54.16% | +27.5% | -22.7% |
| SVOL | Simplify Volatility Premium ETF | 20.43% | 21.03% | +12.5% | -8.7% |
| QDTE | Innovation-100 0DTE Covered Call Strategy ETF | 19.37% | 42.51% | +25.5% | -16.0% |
| XDTE | S&P 500® 0DTE Covered Call Strategy | 14.94% | 30.09% | +16.5% | -12.5% |
Read the price change column against the yield. When a fund yields 60% and its price fell 50% over the year, most of the payout was the price.
Ten questions before you buy
- What exactly does the fund hold and sell? (Read the prospectus summary.)
- What has its total return been since launch, against what it’s built on, over the same dates?
- How much has its share price fallen since launch? Any reverse splits?
- How much of recent distributions was return of capital?
- Has the payout per share been rising, flat or falling?
- Would I own the underlying stock or index outright?
- What does the fund cost each year?
- How big is the fund, and how long has it existed?
- Which account will hold it, and what will the tax be?
- What share of my portfolio will it be, and what’s my plan if the price halves?
Check your understanding
4 questionsWhy is volatility a hidden cost for ultra high yield funds built on swingy stocks?
Putting 60% of a portfolio into a fund yielding 50% whose price erodes 30% a year usually does what over ten years?
Which question matters most before buying an ultra high yield ETF?
Why can a newly launched ultra high yield fund be riskier than an established one?
Related lessons
This lesson is for education only and isn’t financial, investment or tax advice. Tickers are used as examples of how things work, not as recommendations. Figures marked as live come from Dividend Duel’s market data and change daily. See our disclosure.