XYZY Is an Income Juggernaut

Key Points

• YieldMax XYZ Option Income Strategy ETF's yield on major quote servers is listed at 92%!

• The ETF's website lists the yield at nearly 62%, annualizing the most recent dividend.

• Both numbers should cause investors to question what is going on with this highly specialized ETF.

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The big reason why YieldMax XYZ Option Income Strategy ETF (NYSEMKT: XYZY) pops up on investor screens is almost certainly the shockingly large yield it offers. According to major online quote services, the yield is as high as 92%. YieldMax XYZ Option Income Strategy ETF's website lists the yield at a still massive 62% or so.

What is the yield, and how can it be so high? There's a lot that investors need to understand before buying this aggressive exchange-traded fund (ETF).

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What is YieldMax XYZ Option Income Strategy ETF's yield?

If you sum up all the dividends paid over the past 12 months, YieldMax XYZ Option Income Strategy ETF's dividend yield is likely to be close to the 92% you'll find on major online quote servers. If you take the June dividend and multiply it by 12 to figure out the forward dividend yield, the ETF's number is closer to 62%. That's what the ETF's website shows.

Image source: Getty Images.

How can those two numbers be so different? The answer goes back to what YieldMax XYZ Option Income Strategy ETF does, which is highly specific. According to the ETF's website, it is "an actively managed fund that seeks to generate monthly income by selling/writing call options on XYZ."

Essentially, it is selling other investors the right to buy Block (NYSE: XYZ) stock, for which it collects a premium. The premiums the ETF collects are what are used to fund the dividend. In fact, it doesn't even own Block stock.

YieldMax XYZ Option Income Strategy ETF owns cash, Treasury bonds, and calls on Block shares, which give it the right to buy the stock at a future date. It is likely to be a very complicated ETF to understand for anyone who isn't an options trader. At the end of the day, however, the ETF is all about the income it generates from its options trading around Block.

YieldMax XYZ Option Income Strategy ETF isn't a strong performer

The first thing an investor needs to grapple with here is the dividend. It is highly variable and depends entirely on the success of the options strategy. Over the past year, the ETF's monthly dividend has been as high as $1.67 per share and as low as $0.44. That's a pretty wide swing and means that investors can't buy this expecting a reliable income stream. It will be highly variable.

The variability in the dividend will largely depend on investor trading trends around Block. If there's high demand for calls, YieldMax XYZ Option Income Strategy ETF will be able to generate more income. If demand dries up, however, it will generate less income. The dividend's size depends on investor sentiment, not on anything to do with the actual business of Block. This is not an investment in Block, which the ETF clearly states on its website.

Data by YCharts

However, there's a bigger problem here. With so much cash going out the door to investors in the form of dividends, there ends up being less and less capital in the ETF itself. As the chart shows, since the ETF's inception, it has paid a large, highly volatile dividend, and the value of the ETF has trended steadily lower. For investors who are trying to live off the income they generate from their portfolios, this is not a great outcome.

Data by YCharts.

The thing is, even if you reinvested the dividend that YieldMax XYZ Option Income Strategy ETF has paid, the total return isn't exactly great. An investor would have been better off with an S&P 500 (SNPINDEX: ^GSPC) ETF. YieldMax XYZ Option Income Strategy ETF is not an income panacea -- it is a highly specific ETF using a fairly risky income-generating investment approach that is tied entirely to one underlying stock.

Who is this YieldMax XYZ Option Income Strategy ETF for?

To get it out of the way up front, YieldMax XYZ Option Income Strategy ETF is not meant for conservative income investors. It is for aggressive investors who want exposure to covered call writing around Block. This means it could be a good fit for an investor who owns Block but who doesn't want to sell the stock. Other investors should think very carefully before dipping their toes into this unique, highly focused ETF.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Block. The Motley Fool has a disclosure policy.