Ultra High Yield ETFs

What You Should Know about Yield Max and Other Similar Companies

A Cautionary Tale

In late November 2022, a company called YieldMax released a fund like no other. Its ticker was TSLY, and its annualized distribution rate sometimes exceeded 100%.

Many investors, including those with little or no investing experience, saw the yield and thought, “I can make 100% per year?” Money poured into the fund, which was based on Tesla (TSLA), a highly volatile stock with passionate retail speculation. Over time, TSLY’s NAV declined, and YieldMax eventually did a reverse split on the fund. During this period, YieldMax launched additional funds, and many followed the same pattern: high percentage distributions, but declining NAV meant shrinking dollar payouts. This left YieldMax with very unhappy investors.

Throughout this time, YieldMax was transparent about how the funds worked. The company’s owner, Jay Pestrichelli of ZEGA Financial, did dozens of interviews on news shows and YouTube, explaining clearly that if you didn’t reinvest the dividends, you were divesting from the fund. Despite his warnings, many investors didn’t understand the mechanics or chose to ignore them. I don’t blame YieldMax for this.

In fact, several YieldMax funds have performed well: CHPY, GDXY, SOXY, and BIGY. CHPY and GDXY don’t target a specific distribution rate, while SOXY and BIGY target 12%. I also expect YieldMax’s newer target-25% funds to do well in strong bull markets (NVIT will, anyway. The rest of the underlyings for the other funds suck).

I say all of this because the history of the ultra-high-yield community and YieldMax is instructive. As I’ve watched the saga unfold, I’ve concluded that many content creators covering these funds don’t actually understand them. In this article, I’ll explain how ultra-high-yield funds actually work, when they make sense, and how to use them without losing your shirt.

What are Ultra-High-Yield Funds?

Ultra-high-yield funds, like those from YieldMax, Defiance, and GraniteShares, are not traditional dividend funds. They don’t own a portfolio of dividend-paying stocks and pass through the dividends. Instead, they use options strategies (primarily covered calls and synthetic positions) to generate income from stocks that may not pay dividends at all, or pay very little.

The most common structure is the covered call strategy. The fund either owns shares of the underlying stock or uses synthetic positions to replicate ownership, then sells call options against those positions. The premium collected from selling those calls is distributed to shareholders as “dividends.”

But here’s what most people miss: these aren’t dividends in the traditional sense. They’re option premium income. And option premium income behaves very differently than corporate dividends.

When a company pays a dividend, it’s distributing a portion of its earnings. When an options-based fund pays a distribution, it’s monetizing volatility and giving up upside. If the underlying stock rips higher, the fund’s upside is capped at the strike price of the calls it sold. The distribution you received came at the cost of potential gains.

This is why these funds can have massive yields during sideways or moderately bullish markets, but they get crushed when the underlying stock goes parabolic. You trade participation for income. That’s the deal.

When Ultra-High-Yield ETFs Work

Ultra-high-yield funds work best in specific market conditions:

1. Strong, sustained momentum in the underlying sector. If you’re holding NVDY or NVIT during a raging AI bull market, you’re collecting fat premiums while the underlying appreciates steadily. The fund gives up some upside, but you’re still getting capital appreciation plus high income. This is the sweet spot.

2. Sideways or choppy markets with high implied volatility. When stocks are bouncing around but not trending strongly in either direction, option premiums are elevated. The fund collects premium, the stock doesn’t run away from you, and you get paid to wait. This is where covered call strategies shine.

3. You have an exit strategy. The single most important factor is knowing when to get out. These funds are not buy-and-hold-forever investments. They’re tactical plays. You enter when the sector has tailwinds, you collect distributions while momentum is strong, and you exit when the tailwinds fade or the underlying fundamentals deteriorate.

I’ve made this a personal rule: once I sell out of a more aggressive or leveraged ultra-high-yield fund, I lock those gains into my core funds (GPIX and GPIQ, in my case). I only deploy new capital into riskier plays when worthy opportunities present themselves. This prevents me from chasing returns with my winners and keeps my core portfolio intact.

When Ultra-High-Yield Funds Don’t Work

These funds fall apart in specific scenarios:

1. Bear markets or steep drawdowns. When the underlying stock tanks, the NAV of the fund tanks with it. The distributions might remain high on a percentage basis, but the dollar amount shrinks because the NAV is shrinking. If you’re taking distributions in cash and not reinvesting, you’re liquidating your position at declining prices. This is exactly what happened to early TSLY holders.

2. Parabolic moves in the underlying. If you’re holding a covered call fund and the underlying stock goes vertical, you’re stuck watching from the sidelines. Your upside is capped, and you massively underperform just holding the stock. This is the price you pay for the income.

3. You don’t understand the mechanics. If you think the yield is “free money” and you’re not tracking NAV, you’re going to get blindsided. These funds require active management and understanding. These are not instruments for passive investors. It requires active monitoring and involvement.

A Note on Other Strategies

Not all ultra-high-yield funds use covered calls. Some funds, like those from Defiance and others, use put-selling strategies, synthetic dividends, or more complex option structures involving spreads and collars. These strategies have different risk-return profiles than covered call funds.

Put-selling funds, for example, collect premium by selling puts rather than calls, which means they’re exposed to downside risk in a different way. Funds using spreads or collars often have lower yields but more defined risk parameters.

I’ll cover these alternative strategies in a future article, as they deserve their own analysis. For now, just know that when I refer to “ultra-high-yield funds” in this piece, I’m primarily talking about covered call and synthetic covered call strategies like those used by YieldMax.

Common Misconceptions

Misconception 1: “The yield is guaranteed.”

No. The yield fluctuates based on market conditions, implied volatility, and the fund’s ability to generate premium. A fund targeting 25% annual distributions might pay that in a bull market and 10% in a bear market.

Misconception 2: “I can just take the distributions and live off the income.”

Only if the NAV is stable or growing. If NAV is declining and you’re taking distributions in cash, you’re eating into principal. If your NAV is decreasing, your income will shrink with it. And if your total returns aren’t positive, you’re losing money, income or not.

Any income you plan to live off of should at least be stable. While some covered call funds have been stable since inception, that’s unlikely to last forever. You must be ready to pivot when the time comes. Remember, income and total return are NOT the same thing.

Misconception 3: “These funds are a scam because the NAV declines.”

NAV declines happen for two reasons: the underlying stock declines, or the fund is paying out more than it’s earning in premium (return of capital). The first is a market risk you accept. The second is unsustainable and should be avoided. But neither makes the fund a scam—it makes it a tool that requires understanding.

Misconception 4: “Reinvesting dividends solves everything.”

Reinvesting helps you maintain share count, but it doesn’t change the underlying economics. If the fund is in a declining NAV spiral because the underlying stock is tanking, reinvesting just means you’re buying more shares of a sinking ship. Reinvesting works when the underlying has momentum. It doesn’t fix a broken thesis.

My Approach

I use ultra-high-yield funds tactically, not as core holdings. I look for funds in sectors with clear tailwinds: AI, semiconductors, biotech breakthroughs, commodities in supercycles. I enter when momentum is strong, I collect distributions, and I exit when the tailwinds fade or the chart breaks down.

I treat these funds like businesses. If the business (the underlying sector) is thriving, I stay invested. If the fundamentals deteriorate or the technicals roll over, I exit. I don’t marry positions. I don’t hope and pray. I allocate capital, extract value, and move on.

And here’s the key: I lock gains from these tactical plays into my core holdings. GPIX and GPIQ are two examples that provide diversified income and growth exposure. They’re the foundation. Ultra-high-yield funds are the opportunistic layer on top. When I take profits from the opportunistic layer, those profits go into the foundation. New capital, not recycled gains, goes into the next tactical play.

This keeps me from eroding my base and ensures that even if I get a tactical call wrong, my core portfolio continues compounding. If things work out the way I hope, the ultra high-yield ETF grows in NAV despite their very high distributions. This has happened for CHPY and GDXY, but that doesn’t mean that the NAV will not eventually decline when those markets cool down.

Conclusion

Ultra-high-yield funds are not for everyone. They require understanding, active management, and discipline. But used correctly, they can be powerful tools for generating income in the right market conditions.

The people who got wrecked by TSLY didn’t lose money because YieldMax is a scam. They lost money because they didn’t understand what they were buying. They saw a big yield, assumed it was passive income, and ignored the mechanics.

Don’t make that mistake. Understand the product. Know when to use it. Know when to walk away. And above all, treat your portfolio like a business, not a lottery ticket. In the next article, we will explore what it means to treat your portfolio like a business.