The Tax Problem with Hyper-Income ETFs
YieldMax's $MSTY is an income-monster cautionary tale for Tax Planners
“There Ain’t No Such Thing As A Free Lunch”, popularized by Robert Heinlein, has never been truer than it is today, as countless ETFs seem to be promising, if not Free Lunches, heavily discounted snacks.
Here’s the quote:
“Options-income strategies have reached their apotheosis with the YieldMax series, with funds like the YieldMax MSTR Option Income Fund (MSTY) making distributions approaching 100% a year. But while these synthetic long (and short) positions do deliver headline grabbing distributions, the total-performance drag, high-fees and utterly unpredictable tax-treatment embedded in their structure make them a challenging fit in a traditional portfolio or tax-planning context. MSTY shareholders just filing their 2024 taxes may be surprised to learn that 100% of their distributions were taxable income, vs. the >50% Return of Capital estimated with each individual 2024 distribution. Buyer — and CPA — beware. ”
- Dave Nadig, Independent ETF Expert.
Let’s take a look at the largest and most popular of these funds, the YieldMax MSTR Option Income Strategy ($MSTY), which, as the website promises, generates a lot of distributions.
Let’s start with the basics. MSTY, like almost all hyper-income funds, owns none of the underlying stock (Strategy - MSTR). Instead, it owns a pile of short-dated treasuries, used as collateral for the options strategy: the fund sells a bunch of calls fairly close to the current price of MSTR, and it buys a bunch of calls (or, as they have recently, sells a bunch of puts) further out of the money.
This strategy generates income from selling volatility (so, with lots of vol, lots of income), while still giving the fund some exposure to the daily moves of MSTR.
Let’s see how MSTY has done over the last year, and what it’s meant for your portfolio:
(First chart: Raw price data, dividends marked - Analysis below the fold)
Keep reading with a 7-day free trial
Subscribe to Nadig.com to keep reading this post and get 7 days of free access to the full post archives.