ETF Spotlight: YMAX, the YieldMax 'Fund of Funds'

As investors seek alternative income sources in a volatile and uncertain market, options-based income funds like the YieldMax Universe Fund of Option Income ETFs (YMAX) have surged in popularity.

Issued by YieldMax, a firm known for packaging sophisticated options trades into simple ETF wrappers, YMAX joins a lineup that includes the massively popular YieldMax MSTR Option Income Strategy ETF (MSTY).

In this spotlight, we’ll explore how exchange-traded funds like YMAX work, how they compare to other strategies like MSTY and which types of investors are best suited for these high-income products (and who should avoid them).

How YMAX Works: Options Income ‘Fund of Funds’

YMAX is an actively managed exchange-traded fund issued by YieldMax that aims to generate a high level of current income through a unique "fund of funds" structure.

Fund of Funds Approach

Instead of investing directly in individual company stocks, YMAX primarily invests its assets in shares of other YieldMax ETFs.

Synthetic Covered-Call Strategy

Each of the underlying YieldMax funds uses a synthetic covered-call strategy. This means they aim to generate income by selling (writing) call options on the shares of specific underlying companies, like Apple Inc. (AAPL), Tesla Inc. (TSLA), Nvidia Corp. (NVDA) and Microsoft Corp. (MSFT), without necessarily owning the physical shares. 

Income Generation

The primary driver of potential monthly income for YMAX (and its underlying ETFs) comes from the premiums earned from selling these short-term call options. This income is then distributed to YMAX shareholders.

Capped Upside and Downside Risk

Due to the nature of the covered-call strategy, the underlying YieldMax ETFs and therefore YMAX itself, have a capped potential for gains if the prices of the underlying securities increase significantly. In exchange for the high income, investors forego some of the potential upside appreciation. 

Conversely, the fund is subject to all potential losses if the shares of the underlying securities decrease in value, which may not be fully offset by the income received. This means that while it aims for high income, there is still capital risk.

MSTY vs. YMAX

A good way to understand some the most popular YieldMax ETFs is to compare MSTY to YMAX. While MSTY is a highly concentrated bet on income generation from Strategy (MSTR) stock, which implicitly links it to Bitcoin, YMAX is a diversified approach to income generation across a broader range of high-profile growth stocks by investing in multiple single-stock YieldMax ETFs. 

Here’s a breakdown of the key differences.

Concentration vs. Diversification

• MSTY: This is a single-stock ETF, meaning its entire strategy is focused on the price movements and options premiums of a single company, Strategy. This makes it highly concentrated and susceptible to the specific risks and volatility of MSTR.
• YMAX: This is a "fund of funds" that invests in a diversified basket of other YieldMax ETFs. This means YMAX's exposure is spread across multiple underlying single stocks (like TSLA, NVDA, GOOGL, etc.) that those individual YieldMax ETFs target.

Underlying Exposure

• MSTY: The ETF provides indirect exposure to Bitcoin, but through Strategy, which is a company known for its significant corporate holdings of Bitcoin. So, MSTY's performance is heavily influenced by MSTR's stock, which in turn is highly correlated to Bitcoin's price.
• YMAX: The fund provides broad exposure to a variety of large-cap growth stocks that are covered by the other YieldMax ETFs it holds. It is not specifically tied to Bitcoin through a single company like MSTR.

Who Should (and Shouldn’t) Invest in Options Income ETFs

Options income ETFs like YMAX and MSTY are not one-size-fits-all investments. Their appeal depends heavily on an investor’s objectives, risk tolerance and understanding of how these strategies behave in different market conditions.

Ideal Investors

• Income-focused investors comfortable with equity and options risk
• Moderate-growth investors willing to accept capped upside in exchange for yield
• Those diversifying beyond bonds or traditional dividend stocks

Who May Want to Avoid

• Aggressive growth investors seeking uncapped equity upside
• Buy-and-hold investors uncomfortable with derivatives exposure
• Inexperienced investors who may not understand how options affect returns

In short, options income ETFs are tools rather than core holdings for every investor. They can shine in sideways or modestly bullish markets but may underperform during strong bull runs or sharp corrections.

Bottom Line

The explosive growth of YMAX and MSTY reflects a growing demand for income in a yield-starved but volatile investing environment. YieldMax has tapped into this trend by offering accessible, high-income strategies built on sophisticated options trades.

While these ETFs can be effective for certain investors, especially those focused on cash flow, diversification and volatility-aware positioning, they come with clear tradeoffs in return potential and complexity. For the right investor, however, funds like YMAX offer an innovative way to turn volatility into opportunity.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Investing in ETFs involves risks, and investors should carefully consider their investment objectives and risk tolerance before making any investment decisions.

At the time of publication, Kent Thune did not hold a position in any of the aforementioned securities.