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Investors Alley

Investors Alley by TIFIN

This New High-Yield Gold Miner ETF Goes Ex-Div Next Week

The YieldMax ETFs have caught investor attention with their very high-yield covered call single-stock ETFs. A recently launched ETF caught my eye and I am very curious how it will work out for investors.

The YieldMax Gold Miners Option Income Strategy ETF (GDXY) launched on May 13. This innovative ETF, as outlined in the prospectus, is set to employ a synthetic covered call strategy, a unique approach designed to provide investors with indirect exposure to the share price returns of the VanEck Gold Miners ETF (GDX) and current income from options premiums, potentially offering a new avenue for high-yield investments.

I am intrigued by covered call ETFs with commodity values as the underlying assets. Commodities like precious metals, natural gas, and crude oil don’t pay dividends. Their prices swing based on supply and demand conditions. And trader views about those conditions change quickly. I am not a trader, so I appreciate ETFs that give exposure to commodity prices and pay attractive dividends.

The VanEck Gold Miners ETF holds shares of publicly traded gold mining companies. These companies generate revenues and profits from their mining operations, but typically, the share prices swing with the price of gold. This makes sense, since a gold mining company would be more profitable if gold were to increase.

As noted above, GDXY employs a synthetic options position to mirror the returns of GDX. This strategy involves buying call options and selling put options with the same strike price. This innovative options trade is designed to match the returns of the underlying asset, in this case GDX, offering a new and potentially lucrative investment opportunity.

The benefit of the synthetic options trade is that an investor needs a lot less capital, compared to the outright purchase of shares. In fact, GDXY has 106% of its net assets in Treasury Bills and a money market mutual fund. Call options are sold against the synthetic long position to generate cash income, producing a traditional (sort of) covered call trade.

As I write this, GDXY is preparing for its first group of short calls to expire on June 21. The fund is set to pay its initial monthly dividend around July 6-7. This upcoming event will provide us with our first glimpse at the GDXY dividend yield, sparking anticipation for the fund’s future performance.

I am intrigued by the initial cut of the GDXY holdings and curious how the fund managers’ strategy will work. It will be a few months before we see some trends.
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Investors Alley by TIFIN

Why I’m Avoiding These High-Yield ETFs

High-yield ETFs using covered call strategies have become hot investments. Assets in this type of fund have grown tenfold over the last few years, with new option strategy funds launched every week.

In February, we launched the ETF Income Edge service to provide understandable research and recommendations in the new world of covered call ETFs. We initially researched a couple of ETFs that employ a unique options strategy to pay 5% per month in dividends.

Unfortunately, these ETFs (which are very new in the market) have not performed well and were the first entry on my “Do not buy” list.

Defiance ETFs manage three funds that use a put-write strategy. The funds are:

·         Defiance S&P 500 Enhanced Options Income ETF (JEPY)

·         Defiance R2000 Enhanced Options Income ETF (IWMY)

·         Defiance Nasdaq 100 Enhanced Options Income ETF (QQQY)

The three ETFs launched in September 2023. The investment strategy is to sell 0DTE (zero days to expiration) put options to generate cash income of 0.25% per day. Some math tells us this works out to 5% monthly dividends and a 60% annual yield. That’s a very attractive proposition if the fund managers can make it work.

When any stock or ETF pays a dividend on the ex-dividend date, the share price drops by the dividend amount. With these funds paying 5% each month, you get a big drop on the ex-dividend date. With these three particular funds, the expectation is that after the 5% dividend drop, the share price will recover over the next month. The stock price chart should look like a horizontal zigzag.

Unfortunately, these three ETFs’ big dividends have resulted in a steady erosion of the share price, and they are down 20% to 25% since they launched. Each fund has paid eight dividends, so more than half of the cash income has been offset by share price declines.

Here is the chart of one of the funds, and you can easily see the stair-stepping lower:

Also, a 5% dividend on a share price down 25% means the dividend will be 25% smaller than it was in the fall.

I believe the fund manager set too big of an income target of 5% per month. I suspect they will dial back that goal; at a lower cash dividend goal, the share prices will be much more stable.

I monitor these ETFs and dozens more for my ETF Income Edge service subscribers. Most of these funds are months to a couple of years old. As track records develop, I see how well the targeted option strategies perform. The three Defiance funds have disappointed, and I put them on the “Do not buy” list.

Defiance has another 0DTE fund using call options with a 20% yield target. That fund is highlighted in this month’s ETF Income Maximizer issue.
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Investors Alley by TIFIN

Trade of the Week: GME

Last week, we didn’t make a trade in my 48 Hour Income service because I was out for vacation.

In 48-Hour Income, the goal of the service is to generate 1% to 3% returns per week by selling 2-day puts in certain stocks. Instead, let’s talk a bit about selling puts in GME.

Despite the attractive premiums in GME puts, the stock trades entirely on sentiment, which makes it difficult to analyze.

As always, higher returns come with higher risk. In the case of GME, it appears that the risk may be too high to justify the potential returns.

Trade of the Week: GME Read More »

Investors Alley by TIFIN

When to Pay Higher Expense Ratios For Higher Yields

I communicate with many investors, and there is a widespread misconception amongst them about fund (mutual fund, ETF, CEF) expenses. Financial advisors and fund companies perpetuate this myth for their own benefit.

Fund expenses are quoted as a percentage of assets. Expense ratios are published on fund web pages and many financial websites. Fund expenses can range from a few basis points (1/100th of a percent) to several percent.

The conversation about fund expenses changed when Vanguard launched the Vanguard 500 Index Fund in 1976. Before index funds hit the market, all mutual funds were actively managed, with investments chosen by professionals to achieve stated investment goals.

But an index fund can be managed by software. It buys stocks to match the holdings and weightings of a specific index. For example, an S&P 500 index will buy the 500 stocks in the same weight as the index. Index funds do not require the fund sponsor to do any research or pay for an experienced manager.

As a result, index funds have very low expenses. An investment theme grew from this fact that if the average actively managed fund, with much higher costs, could not beat the index, why invest in funds with high expense ratios? With the same portfolio returns, a lower-expense fund will generate a higher return for investors. The financial services industry realized they could market index funds to gather assets without bothering with actually managing the money they collected. “Lower your expenses” became a central educational and marketing point.

The fact not disclosed here is that all reported fund and ETF returns are net of expenses. So, if an ETF with higher expenses reports better returns than a comparable index ETF with low expenses, investors are better served investing in the actively managed fund. Don’t fall into the trap of believing that the expense percentages will reduce published fund or ETF returns.

Active management can pay significant dividends when investing in more focused market sectors. For example, I recommend the Virtus InfraCap U.S. Preferred Stock ETF (PFFA) in my Dividend Hunter service. PFFA has a 2.5% expense ratio, of which 0.80% is management fees. PFFA does use moderate leverage, and interest expense accounts for the balance of expenses.

The iShares Preferred and Income Securities ETF (PFF) is the largest index-tracking preferred stock ETF. PFF has expenses of 0.46%.

PFFA pays stable and growing monthly dividends for investors, which yield 9.45%. PFF pays fluctuating monthly dividends and yields 6.3%. Share price appreciation for the two funds for the last year has been the same. Which would you rather own: Earn 9.45% with higher expenses, or 6.3% with lower expenses?

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Investors Alley by TIFIN

Buybacks or Dividend Increases: Which is Better?

The challenges businesses faced during the pandemic’s early days forced many companies to change their dividend policies. Now, more than four years on from those scary days, it is apparent that many companies will not go back to their pre-COVID dividend practices. Share buybacks have become a more popular way to “return cash to shareholders.”

My investment services focus on dividend income, so I am always looking for companies that pay stable and growing dividends over the long term. Paying a regular dividend with steady increases is a long-term commitment for a company.

The economic challenges brought on by the pandemic made many companies rethink their commitment to the existing dividend policies. In 2020, a lot of dividends were suspended or reduced, or the dividend increases stopped.

In recent years, many companies have not returned to the dividend plans they followed before the pandemic. Instead of paying out more free cash flow as dividends, companies have supplemented or replaced dividend payments with share buyback plans.

With a share buyback plan, the company’s board of directors authorizes a set amount of money to buy in shares. The management team buys shares on the open market at their discretion, up to the authorized amount.

For example, ONEOK, Inc. (OKE) announced a $2 billion share buyback authorization valid for four years earlier this year. ONEOK now grows its dividends vastly slower than before the pandemic.

The potential benefits of buybacks come from the lower number of outstanding shares. Lowering the share count increases earnings and cash flow per share. Buybacks can enhance EPS growth or produce “manufactured” EPS growth for a slow-growing company.

Growing earnings per share should help propel share price appreciation. It should also allow the company to grow its dividend rate. However, there are some potential issues with share buyback plans.

A company must follow through with dividend increases when the buyback helps increase earnings per share. If a company doesn’t grow its dividend, it becomes clear that management and the Board are not serious about returning profits to shareholders.

A buyback may not help the share price. If a company spends billions to buy in shares near a market top, and then stocks crash, the money spent to buy in shares has literally been thrown away.

Corporate leaders call buybacks “returning cash to shareholders,” which I find quite misleading. If I am a shareholder, I get no cash unless I sell my shares, and then I will no longer be a shareholder. The “returning cash to shareholders” claim about buybacks gives me heartburn.

Unfortunately (in my opinion), share buybacks are now in much wider use, and I can’t avoid companies that employ them. For the stocks I research and recommend, I will be paying close attention to how they implement their buyback plans and reward shareholders with dividends and dividend increases. There is potential for buybacks to enhance investor return, but there is also the possibility for the money spent to buy in shares to be completely wasted.

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Investors Alley by TIFIN

Dogfight: Amazon Covered Call ETFs One v. One

During my time as a fighter pilot, a one-versus-one dogfight was one of the most challenging types of flights. This type of mission pitted one pilot’s skills against his opponent. This air combat training was not the type of flight in which you wanted to come home second best.

The new category of single-stock covered call ETFs now has two sponsors offering competing funds covering the same underlying stocks. This type of ETF is new, with the oldest funds operating for just over a year. Many have track records that are only a few months in length.

The funds have been in the market long enough to compare returns for covered call ETFs with the same underlying stock.

So let’s pit two head-to-head in a virtual dogfight of Amazon-trading ETFs.

The YieldMax ETFs were the first with this type of ETF, launching their initial funds in November 2022. Currently, YIeldMax offers 19 single-stock ETFs, with more on the way. These funds have caught the attention of investors with eye-popping distribution yields.

The six Kurv single-stock covered call ETFs launched at the end of October 2023. These funds have lower distribution yields, but the stock price charts for the last four-plus months have very positive slopes.

With at least a few months of track records, I want to compare the returns of the YieldMax and Kurv funds covering the same stocks.

Let’s start at the top of the alphabet and compare the two Amazon.com (AMZN) covered call ETF returns since November 1, 2023.

The current quoted yield for the YieldMax AMZN Option Income Strategy ETF (AMZY) is 34.14%. Since November 1, the AMZY share price has appreciated by 10.35%. The $2.70 in dividends paid add 13.12% to the share price gains. A little math gives a total return of 23.47% since November 1.

The Kurv Yield Premium Strategy Amazon (AMZN) ETF (AMZP) shows a current distribution rate of 15.85%. That’s almost 20% less than the current yield quote for AMZY. From November 1 through March 18, AMZP share price appreciation came in at 17.04%. Over the selected period, AMZP paid $1.40 in dividends. Due to the funds’ ex-dividend schedule, over my selected time frame, AMZP paid one fewer dividend than AMZY. The dividends earned add 5.46% to the share appreciation return, giving a total return of 21.68%.

Those returns are surprisingly close. Or maybe not surprisingly, since the two ETF sponsors use a covered call strategy on the same stock. AMZN has been in a strong uptrend over the past months, and both funds captured a solid portion of the share price appreciation.

I will do the same calculations for the other five Kurv funds against their YieldMax counterparts over the next five weeks and publish my findings here.

I will also track comparisons over the longer term. That information will be shared with subscribers of my ETF Income Edge service – to join, click below.

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Investors Alley by TIFIN

The Only Real “Secret” to Making Millions in the Market

Can you really get rich in the stock market?

We all see ads and pitches about secret systems that can make us rich in no time.

According to some ads, these systems have produced hundreds of triple-digit short-term winners in a row. Using these magical systems, you can make the money you need to avoid the evils of government agencies and elected officials.

I am a huge fan of avoiding government agencies and officials. I will not even live in a neighborhood with an HOA due to my “issues” with authority.

However, I am still waiting to meet the first millionaire from one of these services. To be fair, I have met a bunch of millionaires who have sold these services.

I have met a few people who have made tens of millions of dollars trading the markets.

Most of them use complex, ever-changing math formulas powered by arrays of supercomputers or some form of longer-term trend following enormous amounts of leverage. None of them would sell their strategies to the public for a few thousand bucks a year.

However, you can get rich in the stock market. It takes time, common sense, and some discipline, but people do it all the time…

If you ever find yourself in Miami and see a couple skipping along the ocean front and the older gentleman is wearing a bright red hat, chances are you are about to meet Herb Wertheim.

Herb was born in Philadelphia in 1939 to a working-class Jewish family that had escaped Nazi Germany. In 1945, the Wertheim clan moved to Hollywood, Florida, and lived over the bakery they opened after arriving in the Sunshine State.

Herb and I have a lot in common. We both found many things we would rather do than drop into high school for bothersome stuff like classes and tests.

This little quirk eventually led to Herb being arrested for truancy. The judge gave him the then-popular choice of jail or the Navy, and Herb wisely chose the Navy.

The Navy placement exams revealed that Herb was quite intelligent, but dyslexic. He studied physics and chemistry and ended up working in naval avionics.

While in the Navy, he began investing his excess cash. His first purchase was shares of Lear Jet, since, given his career field, he was very familiar with the company.

After the Navy, he attended Brevard Community College before attending the University of Florida to earn a degree in electrical engineering. He eventually earned an optical engineering degree and a Doctor of Optometry from the Southern College of Optometry.

Herb had a successful career as an eye doctor and inventor. At every step along the way, he lived within his means and invested his excess cash.

Herb is a big believer in innovation and technology, so he bought Apple and Microsoft early on and increased his stake every time they sold. He bought stocks like British Petroleum (BP) and General Electric Co. (GE) when everyone hated them.

He preferred stocks that paid dividends that could be reinvested. Herb only sold shares if the business took a prolonged turn for the worse.

He has an oceanfront home in Coral Gable, a ranch in Vail, Colorado, a place on the Thames in London, and two wine country estates in California.

He and his wife live part of the year on the World Residences at Sea.

He is a big believer in education, so the family name is all over the campus of Florida International University.

Herb had a decent business career. He got “Name on the Medical School Building, hanging out with Martha Stewart, skiing with Buzz Aldrin rich,” buying great companies at reasonable prices and never selling.

Then there is Anne Scheiber; She worked for 23 years for the Internal Revenue Service. Anne Scheiber never made more than $4,000 a year.

She lived simply, even frugally, even her entire life. She invested regularly in the stock market. When she retired in 1944, she had a whopping $5,000 to her name.

When she died in 1995, she left a fortune of $22 million to Yeshiva University in New York City. She bought dividend-paying stocks and never sold them.

I realized this is less exciting than a secret system that can give never-ending lightning-fast triple-digit winners and create seven-digit wealth in very short order.

I also know that some folks do not have another thirty or forty years to compound and must catch up quickly. You can use a variation of the theme involving smaller companies to grow wealth rapidly and help you achieve your goals before it is too late.

It is not a secret system. It is paying great prices for good companies with solid credit and holding them for a long time. It is adding as much cash as possible to the positions when markets are scary. It is not obsessing over every little tick in the market and trying to trade magic patterns.

Go look for all the patient, aggressive investors on the Forbes 400 list or wealthiest people. It will not take you long. Buffet, Icahn, Kravis, David Tepper, Beal, Singer -dozens of billionaires got rich by buying stocks and real estate when they were undervalued and holding for a long time.

Now find me the magic pattern billionaires.

I will wait right here and reread Don Quixote and In Search of Lost Time.

You must get in by November 8th for the best chance at growing a $91,761 yearly income stream from just ONE stock as it happens! Click here for the full details.

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Investors Alley by TIFIN

The Long Slog to REIT Recovery is Starting Now

Real estate investment trust (REIT) values are inversely sensitive to rising interest rates. With the Federal Reserve starting the most rapid rate increase trajectory in history two years ago, REIT values have fallen by about 35% over the same two years.

With interest rates likely to stay higher for longer, what are the prospects for REIT investing?

From April 2022 until July 2023, the Fed increased its Fed Funds Target rate from 0.25% to 5.25%. The rate has not changed since July of last year.

How do the recent changes (or lack of changes) in interest rates affect commercial real estate and REITs?

A central point to remember is that changes in commercial real estate happen very slowly. Mortgages go on for five to ten years. Leases are multi-year contracts. Property values are not always apparent until there is a sale.

Higher interest rates hurt REITs when they must refinance debt or mortgages. A REIT will have laddered maturities, so the adverse effects of higher rates will show up over time, meaning several years.

The remote work trend has led to fewer and fewer workers going to the office. The effects of this will happen slowly as long-term leases expire and companies look for smaller spaces to fit a smaller office workforce. Office sector REITs face some serious challenges over the next few years.

As I noted, the Fed stopped increasing interest rates in July. Those rates are much higher now than two years ago, and, as I hope I have conveyed, it will take REITs several years to adjust to the new interest rate environment.

The Fed is expected to start lowering rates later this year, but the cuts will be minor compared to the magnitude of the recent increases. The Fed Funds rate will likely be around 4% by the end of the year. That’s still much higher than the near-zero percent in effect a few years ago.

REITs will adjust. Borrowing costs will change. Lease rates will increase as leases (outside of office buildings) will increase. Property values (less office buildings) will increase. As we go through the rest of this year and next, REIT management teams will adjust their business operations to return to historic profit levels and growth profiles.

REIT share prices will lead a recovery in business results. Stock markets are forward-looking, and the prospect of lower interest rates will renew investor interest in real estate stocks. I expect REIT values to start the next upward move in the second half of this year. It may happen sooner, but it may take a little longer.

I don’t recommend trying to time the upcoming REIT bull market. Instead, you can accumulate shares of the Hoya Capital High Dividend Yield ETF (RIET) and earn a 10% yield with monthly dividends while you wait.

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Investors Alley by TIFIN

The Most Intriguing ETF I’ve Ever Seen

The timing of the launch of our new ETF Income Edge service was very fortunate—I see newly announced ETFs in this category hit my inbox almost daily, usually two or three at a time. We research, review, and recommend ETFs that use options strategies to boost yields or returns.

Many of these funds, especially some of the single stock covered call ETFs, sport eye-popping yields. While distribution yields are not the whole story, they do give us a lot to talk about.

As it happens, the prospectus of a new fund hit my desk last week, and I can’t wait to see the distribution payouts from this one – I think you’ll be interested…

The YieldMax ETFs have become popular with their single stock funds covering the most popular large-cap stocks. These funds have distribution yields ranging from 20% to over 100%. Yes, the YieldMax NVDA Option Income Strategy ETF (NVDY) has a current quoted yield of 108.46%. Yields change monthly depending on the declared dividends.

Recently, YieldMax issued a couple of fund of funds using the individual stock funds:

These two funds have paid just one monthly dividend, so the track record is nonexistent.

The latest fund from YieldMax, the YieldMax Ultra Option Income Strategy ETF (ULTY), truly intrigues me. However, this fund has only been trading for a handful of days, so it’s far too early to get a good handle on whether the strategy will perform as expected.

The fund has a subadvisor that will screen stocks for implied volatility, trading volume, and liquidity. The subadvisor will select 15 to 30 stocks for a covered call option trading strategy.

The underlying stocks can be purchased directly, or indirectly with a synthetic long position with short at-the-money puts and long at-the-money calls.

Portfolio income will be earned from selling calls against the underlying stock positions.

High implied volatility means that call options will be more expensive. For a fund that sells calls, the greater premium levels should produce a higher dividend yield than the more traditional covered call ETFs. The yield could potentially be a lot higher.

Actual performance from ULTY will not be apparent for several months. The fund is using a unique stock screening strategy to potentially generate higher returns and yields. I will closely watch this one and provide the ETF Income Edge subscribers with regular updates. To see how to join and get my updates as soon as I get them, click below.

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