BlackJack3D
Overview
I strongly believe that we are in one of the absolute best times in modern history to be an income focused investor. There is such an abundance of different high-yielding funds across all asset classes, like REITs, closed end funds, business development companies, and now option-based ETFs. YieldMax COIN Option Income Strategy ETF (NYSEARCA:CONY) offers investors a massive 96.5% yield, according to YieldMax’s website. YieldMax has launched a plethora of these high-yielding funds over the last twelve months, and CONY is my strongest conviction fund out of them all.
YieldMax
I believe that there is both upside price potential as well as huge income potential that can be captured over the next twelve months. My assumption ties to the underlying asset structure that CONY is linked too, as well as the current outlook surrounding Bitcoin (BTC-USD). I know the relevance of crypto may turn some of you away, but I ask you to stick with me here, as I will try to make this as straightforward as possible. CONY has a very recent inception, dating back to August 2023. Despite the short history, we can see that CONY’s price has failed to show any growth, amounting to a negative return of 1.2%. However, when including the massive distributions since inception, the total return sits above 116%, far outpacing the total return and price movement of the S&P 500 (SPY).
Data by YCharts
COIN has a total annual fund operating expense of 1.01% and is actively advised by Tidal Investments and sub-advised by ZEGA Financial. The fund’s primary objective is to seek current income. The fund does this by implementing an option strategy. As a result, the large majority of these YieldMax funds all have the similar problem of a decreasing share price over time. This issue can be attributed to the high distribution rate which gets deducted from the fund’s NAV. For example, I recently covered YieldMax Ultra Option Income ETF (ULTY) and the price is down over 35% for the year. I pulled some of YieldMax’s other funds as a point of reference.
Data by YCharts
Structure & Downside
According to the fund’s prospectus, CONY is an actively managed ETF that seeks current income off of its exposure to Coinbase Global (COIN). COIN is arguably one of the most popular cryptocurrency marketplaces at the moment. CONY strategically uses synthetic call options to generate income from the indirect exposure to COIN. The term synthetic here indicates that CONY doesn’t actual hold the underlying asset COIN as part of their portfolio. However, CONY can still generate high levels of income by selling call options to earn premiums against the price movement of coin.
A downside of the option strategy is that the upside is effectively capped. Due to the at-the-money option structure, the price upside is limited at whatever the strike price is. As a brief explanation, let’s imagine that CONY sets a strike price of $250 on the underlying stock of COIN, which currently trades at $242 per share. If the price appreciates to $260 per share, the option would execute at the $250 price and CONY’s upside would be capped here. This means that CONY holders would miss out on the additional upside which the underlying COIN stock experienced. However, there are no downside caps here and CONY would experience the full impact of COIN falling in share price. This makes timing buys very important with a fund like this.
Looking through the full prospectus, I located a very handy breakdown of the different types of option strategies that the fund may use. The use of call and put options are implemented here on maturity targets ranging between one and six months.
CONY Prospectus
Short-Term Bull Case
Even though CONY doesn’t actually hold common shares of COIN within the fund, it can still benefit from its upward price movement. However, I strongly believe that we are yet to see the upside of the prior catalyst within the crypto market: the Bitcoin halving. Just to provide a short summary, the Bitcoin halving event occurs every four years within the Bitcoin network. The significance of this event is that the reward supply essentially gets cut in half for the miners who contribute to new blocks. The goal of this process is to effectively reduce the rate at which new Bitcoins are created so that the total supply of Bitcoins is limited to twenty-one million.
Since this process limits the supply, it acts as a deflationary measure relying on the principles of scarcity. As the supply slowly becomes more limited over time, this assumption is that this will lead to increasing prices and demand. To help paint a picture, this is similar to the same concept that plays out with housing: as the supply decreases, demand typically increases alongside the value of homes. The data clearly tells us that this is the trend with Bitcoin following every instance of a halving event over the last decade.
Bitbo Charts
Taking a look at the chart above, we can see each halving indicated by the green vertical lines in 2013, 2016, 2020, and 2024. As described, we can see that shortly after every single halving event, the price quickly moved to the upside. While we can’t always rely on past events to carry into the future, this trend has never been disrupted, and it backed by basic economic principles of supply and demand.
As we can see, the most recent halving even happened this year in 2024 and the price of Bitcoin has yet to take off to the upside. While I cannot provide any specific predictions on how high Bitcoin will go, I do think that CONY will be a unique vehicle to benefit from the rise. Not only will we capture some price appreciate, but we would also get paid some high income while we wait. I would strongly recommend reading VanEck’s in-depth article that dives into some long-term valuation estimates for Bitcoin.
The most recent source that I could locate suggests that Coinbase owns about $25B in Bitcoin. As a result of the exposure, the price of COIN has naturally followed the general price trend of Bitcoin. As seen from the graph below, the price movement history looks almost identical. Therefore, it isn’t too unusual to expect COIN’s stock price to shoot up alongside Bitcoin’s price once the halving effect kicks in. After all, we’ve already seen COIN’s stock price increase over 100% on a one-year timeline, so huge price swings aren’t exactly unusual for the company.
Data by YCharts
Additionally, another reference point on the outlook of Bitcoin’s price would be consistent price movements during election years. US Presidential elections are upcoming at the end of 2024 and may have some correlation with the prior spikes in price for Bitcoin. It could just be the halving events tend to align with election years. However, presidential elections typically add increased levels of volatility and uncertainty in the markets. Investors are very reactive, and perhaps money will flow out of the US markets and into alternative assets such as crypto. We can see each election year market by the red bars below. Either during or shortly after the completion of an election year, the price of Bitcoin tends to appreciate as well.
Grayscale
However, we can also see that after the huge spikes in price, there are typically large retractions that follow. As a result, I titled this section as a short term bull case because it can be difficult to determine how long the theoretical price run would last. Since CONY essentially caps the upside potential while still sharing all the downside risk, I will aim to avoid holding my CONY position through huge price declines. Therefore, I want to emphasize that the buy rating issued here is conditional with the goal to lock in gains eventually. This is not a buy, hold, and forget type of investment.
Data by YCharts
Additionally, CONY is trading near its all-time lows while these potential catalysts start to align. I think that if you were to start a position in CONY, now would be the most opportune time in the fund’s history. This goes back to the basic saying of ‘buy low and sell high’.
Dividend Strategy
The massive distribution yield over 96% is certainly real and is backed by looking at the previous distributions. One of the appeals of CONY and other YieldMax funds is that the distributions are issued to shareholders on a monthly basis. The most recent distribution was $1.5732 per share and was issued in the first week of July. The distribution for August has not been declared yet, but I expect it to be announced between the 3rd and 5th of next month. We can see that the distribution amounts vary month to month, and this is because the distribution amount is determined by the implied volatility.
Volatility has a huge effect on the distribution rate because when volatility is high, management can capture higher premiums on the options. This also ties to my bull case, as I expect that the distribution totals may actually rise through the end of the year. With the US Presidential elections on the horizon, I expect the implied volatility to be elevated. After all, it’s already been a crazy warm up the election season with the attempted assassination of Donald Trump followed by Joe Biden dropping out of the race.
YieldMaxETFs
As previously mentioned, I am not approaching this with a typical buy and hold method. Since there is a strong relation to such a volatile asset like Bitcoin, I do not want to stomach the potential large drops in price. Since I don’t plan on maintaining a long-term position, I do not reinvest any of the distributions I receive from CONY. I implement a strategy that I like to call the dividend wheel method. This means that the distributions received from CONY are collected and repurposed to other areas of my portfolio that may offer more opportune chances to grow my wealth.
For instance, I’ve recently taken some of these high-yielding distributions and dumped them into the REIT sector, which I believe to be severely undervalued. This way, I am taking the income from a higher risk investment like CONY, and redirecting those funds into another asset class that isn’t as volatile or reactive to huge price swings. Since the distributions roll in on a monthly basis, it gives a greater sense of flexibility on how we can repurpose these funds. However, this is just the strategy that I follow, and your outlook may be completely different.
I also follow this strategy because I do anticipate that the price of CONY will ultimately trend downward over a long period of time. This is due to the inherent flaw of these option-based ETFs that cap the upside but maintain exposure to all the downside. Over time, this will lead to a deteriorating price that can only be offset by continued reinvestment and additional capital investments.
Most importantly, it is worth mentioning that the distributions received from an option ETF like CONY are typically classified as ordinary dividends. Ordinary dividends are taxed at the most unfavorable rates when compared against the qualified dividends you’d received from a traditional dividend paying stock. While this could be offset in a tax advantaged account like an IRA, I would suggest carefully measuring how much of a tax burden CONY will cause you. A $10,000 investment would yield you over $9,000 in dividend income. This could catch unknowing investors surprised when good old Uncle Sam asks for his cut around tax time.
Risk
I want to put emphasis on the fact that this style of high-income investing involves higher levels of risk. Not only is the underlying synthetic option strategy risky due to the capped upside and varying distribution amounts, but the link to a highly reactive and volatile asset class like crypto enhances the risk. Bitcoin and Coinbase have seen huge price swings in both directions, and this leaves CONY vulnerable to a large price downside if things go south. If I am wrong about the effect that the halving event may have, CONY’s price could ultimately fall to the downside as the market piles out of crypto.
Since the distributions are variable and tied to a volatile asset class, I would suggest that retired investors that are looking for reliable and predictable sources of income look elsewhere. There is a large downside risk here that can destroy principal over a very short period of time. While this hasn’t happened to CONY, I would like to reference YieldMax TSLA Option Income Strategy ETF (TSLY) that has experienced a massive 47% price downside is a one-year time frame. Let this serve as a parallel example of what can possibly happen to CONY’s price if the price of both Bitcoin and Coinbase fall.
Data by YCharts
Additionally, the high levels of income here could create a large tax burden for investors that hold this fund in a regular taxable account. This tax burden may catch some investors off guard and cause an uncomfortable tax situation. Lastly, CONY is not diversified and is linked to one primary stock. To unlock some of YieldMax’s other funds such as YieldMax Universe Fund of Option Income ETF (YMAX), there are not a diverse range of holdings here that can mitigate downside price loss.
Takeaway
In conclusion, I am issuing a strong buy rating on CONY as I believe that we may see increased upside due to the Bitcoin halving as well as higher levels of volatility due to US Presidential elections on the horizon. The massive dividend yield helps introduce a dividend wheel strategy that can super speed your portfolio income. The high distributions can be strategically utilized to help increase weight in underserved areas of your portfolio or areas that may present attractive opportunities for growth. The price currently trades near all-time lows, and now would be the most opportune time to initiate a position.
GIPHY App Key not set. Please check settings