With a market capitalization approaching $4 trillion, Apple (NASDAQ:AAPL | AAPL Price Prediction) is an absolute dominator among technology gadget producers. Without a doubt, Apple sells plenty of iPhones and rakes in a boatload of revenue — but for passive income investors, AAPL stock isn’t extremely generous.
To be honest, Apple’s 0.4% forward annual dividend yield isn’t anything to write home about. However, maybe the popular exchange traded fund (ETF) provider YieldMax has a solution for yield-seeking Apple fans.
There is a YieldMax product that fits the bill, but some investors feel that YieldMax is controversial and there may be valid reasons for this. That’s why we’re exploring an Apple stock income strategy ETF with a jaw-dropping yield today. Right now, we’ll uncover the benefits and drawbacks of a fascinating YieldMax fund so you can make your own informed decisions.
Big Fees, Bigger Yield
To sum it up quickly, the YieldMax AAPL Option Income Strategy ETF (NYSEARCA:APLY) uses options to indirectly invest in Apple stock. The fund attempts to extract much greater passive income than you would expect from directly owning Apple shares and collecting the quarterly dividends.
Immediately, we can identify a drawback with the APLY ETF. Specifically, it subtracts 1.06% worth of annualized operating expenses from the share price. Many other ETFs incur annual expenses of 0.25% or less, and if you just hold Apple stock shares, no operating expenses will be deducted at all.
However, a loss of around 1% per year in the APLY share price might not be a major problem. That’s because the YieldMax AAPL Option Income Strategy ETF currently advertises a whopping 70.75% annualized distribution rate.
For YieldMax funds, the distribution rate is similar to a dividend yield. Distributions are periodically subtracted from the share price and paid out to the shareholders in the form of cash.
Suddenly, the 1.06% in annual operating expenses doesn’t seem like such a major problem. After all, you’ll easily make up for the share-price losses if you’re harvesting a 70.75% distribution yield — right? Not only that, but the YieldMax AAPL Option Income Strategy ETF pays out its distributions on a weekly basis, so it might seem like the profit potential is unlimited with this fund.
The Limitations of Covered Calls
At this point, you might wonder how the YieldMax AAPL Option Income Strategy ETF could possibly deliver a 70.75% yield. The fund indirectly invests in Apple stock through synthetic option strategies, and then sells covered calls and/or covered call spreads to generate income.
In other words, the APLY ETF effectively replicates Apple stock ownership and then generates cash by selling call options and/or spreads. There are some potential drawbacks that need to be addressed here.
For one thing, selling covered calls/spreads will tend to limit the gains that can be made when the underlying asset (Apple stock, in this case) rises in price. Thus, if AAPL stock shoots higher, Apple’s direct shareholders will enjoy the full rewards but APLY shareholders may be disappointed with the limited profits from Apple’s share-price appreciation.
Furthermore, as we touched upon earlier, the share price of the YieldMax AAPL Option Income Strategy ETF will decline as the distributions are paid out. So, don’t assume that the APLY ETF’s weekly cash payouts are just “free money” with no drawbacks.
From this chart of the YieldMax AAPL Option Income Strategy ETF, we can see that the fund’s share price has declined 27% over the past 12 months. That’s a serious letdown as the share price of the underlying asset, Apple stock, has gained 7% in the past year.
Not Misleading, but Definitely Risk-Prone
It would be inaccurate to call YieldMax’s APLY ETF “misleading” since the fund’s prospectus spells out the potential drawbacks. YieldMax doesn’t try to hide the high operating expenses and the inherent limitations of selling covered calls and/or spreads.
It’s your responsibility, however, to carefully read the prospectus of the YieldMax AAPL Option Income Strategy ETF before making any financial decisions. There’s a definite possibility that the APLY ETF will incur substantial losses in share-price value.
Besides, the fund’s huge distribution yield could change at any moment. Just because the YieldMax AAPL Option Income Strategy ETF offers a specific yield today, doesn’t necessarily mean it will offer that same yield in a week or a month.
Therefore, the APLY ETF involves risks and if you’re a more prudent investor, it’s probably better to just hold Apple stock shares directly. On the other hand, if you can tolerate share-price weakness, it may be fine to hold a small number of APLY shares.
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