How to Fix NAV Erosion with ULTY
The truth behind NAV decline and a proposed smart approach to balance yield and capital for smoother performance.
If you look across X, Reddit, and other social channels, many high-yield investors seem to want to “have their cake and eat it too”: investing in ultra-high-yield ETFs while also expecting a stable NAV.
While that dream performance has occurred with some single-stock income ETFs over the past year, it’s been fueled largely by the roaring bull market and shouldn’t be considered the norm. On the flipside, portfolio-based income ETFs like ULTY 0.00%↑ saw temporary NAV stability before eventually declining. The reality is that both of those outcomes are by design, based on underlying mechanics, and should be expected.
While total return is the north-star metric for evaluating income ETFs, the desire for a stable (or rising) NAV is understandable. Many new investors entering the high-income space are likely coming in with growth-oriented expectations. Naturally, they hope to see their initial capital appreciate and they become worried when their portfolio slips into the red with unrealized losses.
Achieving both “high yield” and NAV stability with ULTY is technically possible, but it requires trade-offs. We’ll break that down in three parts:
Why ULTY can’t sustain a long-term stable NAV by itself
What YieldMax could do to “preserve NAV” (and why they won’t)
What investors could do to “preserve NAV”
This article is for informational and educational purposes only. It is not financial, investment, tax, or legal advice.
Why ULTY Can’t Sustain a Long-term Stable NAV
Income products have evolved a lot over the years and the spectrum is broadening. On one side you have money market accounts or high yield savings accounts, which often fully preserve the initial capital while generating interest with low single-digit yield. On the other side, you now have ultra high-yield ETFs, which are much higher risk, are not focused on NAV preservation, but can potentially offer outsized total returns.
Before we go further, it’s worth acknowledging that investment goals and risk tolerance varies per investor. In a prior article, I wrote about about two different investor profiles in the income ETF community — neither is right or wrong, each just approaches these ETFs differently:
DRIP Maximalist - Focused on snowballing distributions and total returns
Income Earner - Focused on maximizing income while preserving capital through active position management
Inherit in the definition, I’d wager that it’s the Income Earners who love the unique value proposition ULTY provides as a “mini-hedge fund”, but they wish the NAV was more stable.
How realistic is that NAV expectation? Not really — and that’s the case with most high-yield ETFs too over the long term especially since they experience nearly all downside, but only partial upside.
To paint the bigger picture, let’s do some napkin math with conservative numbers. Let’s assume :
The most impactful factor to ULTY’s NAV is the performance of the underlying basket of stocks. Distributions are also a key factor alongside secondary impact from the performance of the options and collar strategy.
ULTY has an implied beta of 0.6 relative to the underlying basket of stocks. This means if the underlying stocks rally 10%, then the ETF will only feel 6% of impact.
ULTY distributes 10 cents weekly while at a $6 NAV. This equates to an 88% simple annual yield and a distribution rate of 1.67% of NAV.
Therefore a 1.67% increase in NAV is needed to offset the ex-div drop on a weekly basis. To achieve this, the underlying stocks need to increase by 2.78% weekly (based on the 0.6 beta).
That might not seem like a big requirement, since some of these high IV stocks jump over 20% on earnings, but once you compound that over time, you start the see the challenge of sustainability.
In order for ULTY to maintain a stable $6 NAV and offset the weekly 10 cent distributions, here’s a rough generalization how much the underlying basket of 20 stocks would need to continually increase:
Over 1 week: 2.78% growth in underlying stocks
Over 4 weeks: 11.5% growth in underlying stocks
Over 6 months: 103% growth in underlying stocks
Over 12 months: 315% growth in underlying stocks
EDIT (9/17): Percentages updated based on a formula error (overall values increased vs prior reported figures for 6 & 12 months). And please note that these figures don’t fully account for the secondary impacts on NAV (like options performance), but are still illustrative of the exponential growth needed for sustainability.
If you recall back in July, I showcased in this article that the underlying basket of stocks was up +63% and driving the ETF’s stable NAV. I also cautioned that it could not sustain this performance forever and we saw that become a reality in August.
It’s technically not impossible to achieve that long-term performance, but the chances are very slim as stocks don’t go up in a straight line and pullback periods are healthy. In order to change that outcome in any meaningful way, direct intervention is either needed by YieldMax or by investors.
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What YieldMax could do to “preserve NAV” (and why they won’t)
The data in the section above hopefully speaks for itself in showcasing that NAV isn’t currently sustainable for ULTY (and many other high-yield ETFs) over the long term.
And while underlying stock performance is an external factor, investors often ask the next question: Is YieldMax responsible for helping out investors and implementing changes to ULTY?
They certainly have several levers they could pull to try and offset NAV decline. This includes things like:
Lowering the distribution rate and weekly payout values (see the historic trend analysis here).
Tweaking the options strategies to provide even more upside capture from underlying stock growth (and/or more downside protection when needed)
Switching back to monthly distributions so NAV impact isn’t compounded weekly
For example, although the distribution value would be the same (~40 cents monthly), instead of needing the underlying stocks to increase 11.5% over 4 weeks, they would only need to increase 6.6% to offset the drop.
Unfortunately, especially in the case of the first two levers, this comes at a cost: lower yield and income for investors — and that directly contradicts the investment objective of the ETF.
ULTY is defined as an ultra option income strategy ETF, aka. it seeks income “at all costs” (regardless of NAV performance or other factors).
The investment objectives are stated front and center on the YieldMax website:
ULTY’s primary investment objective is to seek current income.
ULTY’s secondary investment objective is to seek exposure to the share price returns of the Underlying Securities, subject to a limit on potential investment gains for each such security.
What’s important about the secondary investment objective is the precise wording. “Seek exposure to the share price returns” implies exposure to both the upside and downside. And the 2nd part then further clarifies if/when there are investment gains, impact is limited.
Here’s another snippet from the site that doubles down on performance expectations:
Investing in the fund involves a high degree of risk. Due to ULTY’s investment strategy, ULTY’s indirect exposure to gains, if any, of the share price returns of the Underlying Securities is capped. However, ULTY is subject to all potential losses if the shares of the Underlying Securities decrease in value, which may not be offset by income received by ULTY.
By design, YieldMax has created a high yield ETF with the primary goal of maximizing income for investors — and all other performance metrics are not the main concern. What you see is what you get if you’re looking for high income, high total returns, and even some downside protection with protective puts.
Therefore, it’s not YieldMax’s responsibility to fix NAV performance. While they have tweaked the prospectus in the past, if they wanted to truly create a more “balanced” fund, it would likely come as a brand new ETF.
Ultimately, investors own the responsibility of knowing what ULTY is and isn’t, and then deciding if they want to invest. And if they do invest, and they still want to try to preserve NAV, they will need to consider smart approaches to balance yield and capital for smoother performance.
What Investors Could Do to “Preserve NAV”
The straight forward answer is a mindset shift and active management. If you simply sit idle, nothing is likely to change (and waiting around for underlying stocks to rally will only slightly increase ULTY’s NAV).
Step 1: Accept that achieving a stable NAV will come at the cost of some income (whether it’s you or YieldMax pulling additional levers)
Step 2: Accept that achieving a stable NAV means not yield chasing and “full-porting” into ULTY
Step 3: Diversify. Even a basic two-fund income portfolio can hypothetically help stabilize NAV. Many investors opt to spread out their income investments across dozens of funds.
While options, hedging, or other alternative means to drive additional gains in your portfolio exist, I wanted to focus on the most straight forward and investor-friendly solution: a basic two-fund high-yield income portfolio.
This switches the constrained mindset of only fixating on ULTY performance into a broader scope of aggregate portfolio performance. Thus a “stable NAV” slightly changes definition to more along the lines of “preserving initial capital of the portfolio”.
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Above is the final result of my hypothetical two-fund portfolio, which strived to balance NAV/capital preservation while maintaining income generation. I screened and filtered dozens of income ETFs on weeklypayers.com to find the best pairing while minimizing the risk profile and maximizing performance. The back-test starts May 12th which is when ULTY NAV stabilized after the post-Liberation Day bounce (and we also saw the full effect of ULTY’s new mechanics).
For example, investing a lump sum of $10,000 on May 12th would result in two different outcomes (non-DRIP results to keep things simple):
100% invested in ULTY: -10% decline in NAV, but 18% in total return
Investing in ULTY + 2nd ETF (with specific % split): +3.6% NAV growth and 25% total return
Applying this type of strategy, mindset shift, and active management can potentially allow investors to better balance yield and capital within their income portfolio.
For paid subscribers, let’s dig into the nitty gritty details more below. I’ll reveal which income ETF I paired with ULTY, the optimal weighting of the fund split, and a review of full performance across multiple scenarios.