The YieldMax MSTR Option Income Strategy ETF (NYSEARCA:MSTY) has become a hot topic among income-seeking investors, thanks to its impressive dividend yields tied to Strategy (NASDAQ:MSTR), a company heavily invested in Bitcoin (CRYPTO:BTC). 

Ahead of the exchange-traded fund’s recent monthly distribution, investors wondered whether the payout would fall. MSTY’s yield has often exceeded 100% (it stands at 135% today) and if the distribution falls, the yield may contract. 

Because the YieldMax MSTR Option Income Strategy ETF faces issues as it grows and approaches regulatory limits, investors should expect MSTY’s dividend to decline. But it’s more nuanced than that, so let’s look closer at what it means for an investor. 

Expect Change

MSTY generates monthly income by employing an options-based strategy, primarily selling call options on MSTR stock. This approach has historically delivered eye-catching yields with a total of $28.69 per share in dividends paid out in the last year. 

However, with the latest payout dropping to $1.47 per share, a 38% decline from May that could possibly be tied to losses in realized and unrealized positions in MSTR through its options, could signal profitability challenges. This would pressure future payouts if losses persist or worsen. 

Adding to the concern, MSTY’s shares outstanding have jumped 40% since the prior dividend, rising from 130 million to 190 million. This rapid growth dilutes the per-share value, meaning the fund must significantly increase revenue to maintain its high yields, a tall order given the suspected financial hit.

Forcing MSTY’s Hand

A major factor looming over MSTY is the Security & Exchange Commission’s 25% options limit for funds covered by the Investment Company Act of 1940, which caps exposure to a single issuer like MSTR when using derivatives. 

As MSTY expands, it is nearing this threshold, forcing the fund’s managers to consider making adjustments. The YieldMax managers could: 

• Change MSTY’s prospectus to allow for more flexibility
• Add direct Bitcoin exposure
• Launch a second fund to handle overflow demand 

While these moves could diversify income streams, they come with risks.

Direct Bitcoin exposure, for example, might boost returns during crypto rallies, but it adds volatility, potentially destabilizing the dividends paid. A second fund could dilute the original’s assets, also leading to smaller per-share payouts over time. Additionally, paying out more dividends to manage fund size might offer a short-term boost, but could drain reserves needed for future growth.

MSTY’s call-writing strategy, which caps its gains on MSTR price increases to generate income, adds another layer of complexity. This protects against losses if MSTR drops, but it also limits upside potential if Bitcoin (and thus MSTR) surges. 

Given Strategy’s massive Bitcoin holdings — some 582,000 tokens — global crypto market swings could amplify MSTY’s risk profile, making consistent dividends harder to sustain. It suggests that any evolution of the fund’s income-generating model could possibly come at the cost of lower yields.

Key Takeaways

For investors, MSTY’s high yield remains alluring, but the fund’s reliance on a single stock increases volatility compared to diversified ETFs. Potential losses and rapid share increase suggest the ETF will continue experiencing a downward pressure on dividends unless the fund adapts successfully. Strategic shifts, like Bitcoin exposure or higher payouts, might stabilize yields temporarily, but regulatory limits and market conditions could tip the scale toward decline.

Ultimately, MSTY’s dividend may continue fallingl if it actually generates deep losses, the 25% cap forces structural changes to the fund, or Bitcoin volatility disrupts MSTR’s performance. However, proactive management could mitigate this. 

Investors should monitor MSTY’s next moves, cross-check data from multiple sources, and balance the allure of high yields against the risk of capital erosion. 

 

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