Outrageous 50% yield from gold miners!

This article is for information only.

I was very tempted by this 51.32% yield, so I asked a few of my followers. They all said effectively the same thing, "Stay away!". I decided to investigate further. This is what I found.

Warning! If you don’t like the risk of losing all, or part, of your money? stop reading now, please.

On the other hand, if you like to take lots of risk and need, or want, a high income, then this could be worth a look.

GDX and GDXY

Many of my readers will know of the VanEck? Gold Miners ETF (“GDX?”).? This is an ETF which invests in global gold mining companies.

Today I am going to talk about the the YieldMax? Gold Miners Option Income Strategy ETF (GDXY)?.? ?

According to the “Fund Overview”

“It is an actively managed fund that seeks to generate monthly income by selling/writing call options on GDX?. GDXY pursues a strategy that aims to harvest compelling yields, while retaining capped participation in the price gains of GDX?.”

YieldMax ETFs

You may not have heard of the YieldMax ETFS.? I probably shouldn’t even be telling you about them. ?Some fool, like me, is bound to find that an income of 50% a year is just too hard to resist.?? Then they’ll start bleating when the price goes down.

YieldMax ETFs are available for several well-known stocks.? You’ll easily find the full list using Google.??

They aim to generate a high income by using sophisticated option strategies.? The amount of income which will be generated from these option strategies is highly variable and depends largely on the option premiums available.

The expected forward-looking yield is calculated daily and published on the YieldMax website.? As of today, the highest distribution rate is 125% (NVDA), and the lowest is 13% (XOM).? Collectively the YieldMax ETFs have a distribution yield of around 43% p.a.

Prospectus Warnings re the YieldMax? Gold Miners Option Income Strategy ETF (GDXY)?.? ?

Before I go any further let me quote a few lines from the prospectus:

“Warning: If you invest, you may lose all or part of your money.”

“The Fund does not invest directly in GDX?"

"Investing in the fund involves a high degree of risk."

"The Fund’s strategy will cap its potential gains if GDX? shares increase in value. The Fund’s strategy is subject to all potential losses if GDX? shares decrease in value, which may not be offset by income received by the Fund.?

The Distribution Rate and 30-Day SEC Yield are not indicative of future distributions, if any.

Distributions for the ETFs (if any) are variable and may vary significantly from month to month and may be zero.?

These distribution rates, caused by unusually favorable market conditions, may not be sustainable. Such conditions may not continue to exist and there should be no expectation that this performance may be repeated in the future.”

There are plenty more risks explained in the prospectus.??

Not a recommendation

I do NOT recommend anyone invest in these.? Whatever, the income, it is more probable than not that the price will decline over time.?? This is because the ETFs are designed to catch the full downside, but only part of the upside.

“Distribution Rate”: 51.32%.?

How is this achieved?

Whilst the main assets of the ETF include cash, Treasury Bills, and similar short term monetary paper, the ETF is also exposed to a range of written, (i.e. short), out-of-the-money call options on GDX and written at-the-money put options on GDX. ?At the same time the fund buys a long at-the-money call option.?(Based on market and strike prices at the time of purchase.).

These strategies are designed to generate a net positive income with a capped participation in the upside of GDX, and full participation in the downside.

Read the above again.? You have 100% downside risk for very limited upside.?? The promise of receiving high distributions might not materialise.? You have been warned!

I set out below the underlying positions (excluding the cash and bills).? If you are interested and knowledgeable enough, you could implement the same kind of strategy yourself avoiding the fund’s management charges of 0.99% p.a.

Here's the current option strategy:

GDXY has fallen in price, whilst GDX rose in price

GDXY commenced trading on 22nd June 2024.? Since inception the price of GDXY has fallen by 0.50%.? This compares to the price of GDX which has risen by 1.88%.??

Have a look at the chart below. So far, in its short trading life GDXY (orange line), seems to have done slightly better than GDX (green line) when the price was falling, and slightly worse when the price of GDX was rising.

GDXY has paid one dividend of $0.7959 on July 8th, ?2024.? ? The dividend paid is equivalent to 4.2% of the current share price of GDXY ($18.79).

It is expected to pay monthly dividends.

Disclosure

I have a holding of GDX.

At the time of writing I do not have any exposure to GDXY. I may, or I may not, invest in GDXY later today, or at any time in the future.