NVDY High Income ETF to REPLACE NVIDIA (68% Yield)

Summary

In this video, the host evaluates the NVD ETF, which uses a synthetic covered call strategy on Nvidia stock to generate high income, boasting a 70% dividend yield. While the strategy offers downside protection, it caps potential upside, making it less effective for volatile stocks like Nvidia. The video highlights that despite impressive short-term returns, the ETF often underperforms Nvidia stock, especially during rapid price surges. The host advises that owning Nvidia directly or using strategies like cash-secured puts may be more beneficial for those seeking growth with income generation.

Takeaways

• 😀 The YieldMax Nvidia Option Income Strategy ETF (NVD) uses a covered call strategy on Nvidia stock to generate high income, offering around 70% dividend yield.
• 😀 NVD is gaining popularity, especially after Nvidia's strong second-quarter earnings report despite a 7% stock selloff, which raised questions about the effectiveness of the covered call strategy.
• 😀 The ETF utilizes a synthetic covered call strategy, where options replicate the cash flow of a covered call without owning the stock itself, making it a more cost-effective option than directly purchasing Nvidia shares.
• 😀 The synthetic long position is created by selling put options and buying call options at the same strike price, allowing investors to benefit from price movements without needing to own the stock.
• 😀 NVD's expense ratio is 1.01%, which is considered high, but the 70% dividend yield makes the expense ratio seem negligible in comparison.
• 😀 NVD's performance has been impressive, with a 93% return year-to-date and 174% since inception, but this performance is tied directly to Nvidia's stock, which has seen massive growth in recent years.
• 😀 The synthetic long position requires less capital and provides more flexibility than simply owning Nvidia stock, allowing the fund to adjust its options strategy based on Nvidia's performance.
• 😀 While the high dividend yield is appealing, the covered call strategy limits upside potential, as profits are capped based on the chosen strike price of the options sold.
• 😀 Covered call strategies on volatile stocks like Nvidia can result in missed gains during rallies, as demonstrated by Nvidia's 22% increase in November, while NVD only appreciated by 10%.
• 😀 Despite generating income through call options, the ETF can suffer from 'NAV depletion' if it consistently underperforms compared to the stock itself, as seen in the case of NVD vs. Nvidia in late 2023.
• 😀 For those hesitant about investing directly in Nvidia, a simple alternative like selling cash-secured puts could provide premium income while waiting to buy Nvidia at a lower price, which is discussed in more detail in another video.

Q & A

What is NVD and why has it gained popularity?

NVD is the YieldMax Nvidia Option Income Strategy ETF, which uses a synthetic covered call strategy on Nvidia stock. It has gained popularity due to its high dividend yield, around 70%, and its potential to generate income from Nvidia’s volatility, making it attractive to income-seeking investors.

What are the benefits of high-income ETFs, according to the speaker?

High-income ETFs are beneficial because they provide high monthly dividend distributions, which are especially appealing to retirees. Additionally, they help cushion downside volatility by generating income that can counteract price drops.

What is a synthetic covered call and how is it different from a regular covered call?

A synthetic covered call is a strategy where the investor creates a position using options to replicate the cash flow of a covered call, without actually owning the underlying asset. In contrast, a regular covered call involves owning the stock and selling call options against it.

Why does the ETF use synthetic long positions instead of directly owning Nvidia stock?

Synthetic long positions are used because they require less capital than directly owning the stock. The strategy allows the fund to replicate the price movements of owning Nvidia shares while using options, which is more cost-effective.

How does the synthetic covered call strategy generate income for the ETF?

The synthetic covered call strategy generates income by selling call options against a synthetic long position. The fund collects premium income from the options, which contributes to its high dividend yield of around 70%.

What is the trade-off involved with the covered call strategy?

The main trade-off with a covered call strategy is that it caps the potential upside of the underlying asset, as the fund’s gains are limited by the strike price of the sold call options. However, it provides downside protection by generating premium income, but the protection is limited.

What risk does the ETF face when Nvidia’s stock experiences significant growth?

When Nvidia’s stock experiences significant growth, the ETF’s performance is limited because the covered call strategy caps the upside potential. As a result, the ETF misses out on large gains, such as when Nvidia’s stock surged by 22% in November 2023, while the ETF only appreciated by 10%.

Why might the NVD ETF underperform compared to Nvidia stock?

The NVD ETF may underperform Nvidia stock because it uses a covered call strategy that limits the upside during periods of strong stock performance. Additionally, the ETF's options can lose value if the stock continues to rise, which negatively impacts its returns compared to the stock’s performance.

How does the ETF manage the risk associated with selling options?

The ETF manages the risk by using a small portion of its assets to sell options. The majority of the assets are allocated to treasuries, which act as collateral for the options, helping to generate additional income while mitigating some of the risks from the options strategy.

What alternative investment strategy does the speaker recommend for those hesitant to buy Nvidia stock?

For those hesitant to buy Nvidia stock, the speaker recommends selling cash-secured put options. This strategy allows investors to collect premium income while potentially acquiring Nvidia stock at a lower price if the options are exercised.