YieldMax AI Option Income Strategy ETF's Huge Yield Is Riskier Than You May Think

YieldMax AI Option Income Strategy ETF (NYSEMKT: AIYY) sounds like a dividend dream come true, offering a 227% yield, according to major online quote services. The exchange-traded fund's website lists the yield at a more modest, but still shockingly high, 60% because it annualizes the most recent payment. Before you rush out to buy what looks like a dividend printing machine, you need to understand the very big risks involved here.

What does YieldMax AI Option Income Strategy ETF do?

YieldMax AI Option Income Strategy ETF uses a complex options approach to generate income around C3.ai (NYSE: AI). It does not actually own any shares of the artificial intelligence company, which provides enterprise application software services. There are two key takeaways here: You are not investing in C3.ai by buying this ETF, yet you are still dealing with material idiosyncratic risk because of the ETF's focus on just one stock.

Image source: Getty Images.

What YieldMax AI Option Income Strategy ETF does is generate income through its options strategy, which generally benefits from volatility in the underlying stock. There has been a lot of volatility, with C3.ai stock down 50% over the past year and 70% from its 52-week high. That's helped increase the income the ETF generates, but the results for investors aren't as positive as they may seem.

YieldMax AI Option Income Strategy ETF keeps falling

As the graph below shows, YieldMax AI Option Income Strategy ETF's price has been steadily declining over the past year. So has the dividend payment. That's not new, it's the trend that has existed since the ETF's introduction in late 2023.

AIYY data by YCharts

If you spent the dividends you collected from this ETF, you would have less capital and income. For dividend investors trying to live off the income their portfolios generate, this would have been a terrible outcome. But the story gets worse. Even reinvesting the dividends would have left you with a total return of roughly negative 75%. You would have been better off leaving your money in a high-yield bank account.

YieldMax AI Option Income Strategy ETF is a complicated ETF, and its performance is not impressive. Most investors should stick to ETFs that are easier to understand and that have stronger performance histories. ETFs like Schwab U.S. Dividend Equity (NYSEMKT: SCHD) and SPDR Portfolio S&P 500 High Dividend ETF (NYSEMKT: SPYD) are two two worthy alternatives. Their yields are much lower, but the income you generate will be more reliable, and you won't watch you principle wither away over time.

Reuben Gregg Brewer has positions in Schwab U.S. Dividend Equity ETF. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.