Summary CONY's headline 140% yield is highly tempting, but it's largely driven by destructive return of capital that erodes NAV and share price. Falling NAV and declining distributions mean investors, especially those who bought at higher prices, face significant capital losses and shrinking yields. Despite the eye-catching yield, CONY is likely to underperform; I recommend avoiding it due to unsustainable payouts and ongoing capital erosion. The YieldMax COIN Option Income Strategy ETF ( CONY ) offers one of the highest yields out of any of the Yieldmax income funds, and indeed anywhere in the market: 140%! That's sure tempting, but it needs to be weighed up against several other negative factors, such as capital erosion and declining distributions. This article looks at why it may be wise to say no to temptation. CONY Basics CONY is an actively managed ETF that prioritizes income over capital gains. It has a synthetic long position in Coinbase ( COIN ) using options, and has a familiar options-based income strategy designed to provide income. This strategy caps gains during rallies, but provides a significant dividend. The holdings are a complicated mix of options positions and Treasury Bills held as collateral. Yieldmax CONY sells weekly calls on COIN to generate a premium, and the higher the implied volatility, the higher the premium will be. COIN historically has very high volatility, which is one of the reasons for the huge dividend, although it has fallen in recent weeks. Alphaquery The Dividend If you want a high yiled, CONY delivers, but there are a few considerations. Firstly, CONY sacrifices capital gains to provide a large dividend. If you want growth, it's far better to invest in COIN. Data by YCharts Secondly, the distributions contain a large portion of return of capital (ROC). Yieldmax I will cover this more later, but the point for now is that the ROC erodes the price and NAV. Data by YCharts You may not care when the yiled is 140%, but that yield is an annualized figure for the most recent distribution and only applicable to those buying at the current price of $7.42. For those unlucky enough to buy at $30, the yield is only 31%. In other words, the distributions are declining, as is the yield on cost. SeekingAlpha SeekingAlpha This is due to the falling NAV. CONY can't sell the same amount of options as it once could and therefore can't generate the same amount of premium. Why is the ROC So Destructive to NAV? Return of capital is a convenient way for funds to pay out dividends, as it has tax advantages. It also lets the funds do all sorts of "tricks" - legal ones of course - behind the scenes. As we know, CONY's options strategy provides income, but it also often leads to losses on the option if the rally exceeds the strike price. That isn't really considered a loss as CONY has a synthetic long which cancels out the loss - we think of it as non-participation in the rally or capped gains. However, CONY can book this loss and distribute it as ROC. It doesn't have to, and some funds only re-classify the income (premium) as ROC for preferred tax treatment. However, some funds choose to distribute more than the income they make. There is no clear documentation detailing or explaining this procedure apart from patchy 19a-1 notices. The only real evidence comes from the declining NAV. Data by YCharts The Amplify CWP Enhanced Dividend Income ETF ( DIVO ) is a good example of a fund that uses ROC only as a way to re-classify distributions. As shown in its 19a-1, the distributions can be around 78% ROC. Amplify But its NAV is rising healthily. Data by YCharts The conclusion is that DIVO only distributes its income, even though the income is classed as ROC. CONY, on the other hand, chooses to distribute much more than it earns. Not only does the options strategy cap gains, it allows CONY to distribute all the lost profits as ROC. Why Does This Matter? COIN has been performing well - it is up over 300% since CONY's launch, but CONY's distributions are still falling. The distributions will likely keep falling, and if COIN starts performing poorly, then they will fall even more. Just think of the poor investors who bought at $30 - they now have a huge loss of capital and a yield of only 30%. You may think $7.4 is a good entry price compared to $30, but this is not like buying a stock. When CONY was at $30 COIN was $160. COIN is now $323. In other words, you are not buying the underlying at a good price, you are buying an underperforming asset that is likely to continue underperforming. Conclusions CONY advertises a 140% yield. It's tempting, and that is why CONY chooses to boost its yield through destructive ROC. The 140% yield will be great for a while, but as the price trends lower, the yield on cost will follow and in a year or two, will likely be under 50% and be accompanied by a large loss of capital. I'm saying no.
