The YieldMax Ultra Option Income Strategy ETF (ULTY) has done well this year and is hovering at the highest point on record. ULTY was trading at $5.62, up by over 54% from its lowest level in April this year. So, is this high-yielding ETF a good buy?

How the ULTY ETF works

The YieldMax Ultra Option Income Strategy ETF is a top fund with over $3 billion in assets. It has become a popular fund among investors because of its high dividend yield, which, according to SeekingAlpha, stands at a whopping 117%.

Most importantly, unlike other covered call ETFs, ULTY has done better than the benchmark S&P 500 since its inception in terms of total returns. Data shows that its total returns in the past 12 months was 29%, much higher than the Vanguard S&P 500 Index (VOO) ETF’s 18.8%.

ULTY ETF vs VOO 

The same has happened this year as its total returns are 16.5%, higher than VOO’s 13.5%.

This ETF is different from other covered call funds in that its performance is purely dependent on the manager as it does not track a specific index. Instead, the advisor selects the stocks that the fund will invest in, by specifically looking at their implied volatility.

The fund’s goal is to find stocks that have a higher implied volatility, as these stocks always have a higher options premium, which allows it to generate substantial income.

In most cases, the advisor conducts his analysis by examining upcoming events that are expected to increase premiums. A good example of this is a company’s earnings or a major announcement.

The ULTY ETF’s advisor also conducts quantitative and qualitative screening, which evaluates an asset’s trading volume and liquidity on the asset and the options side.

READ MORE: Top news to drive the VOO and SCHD ETFs this week

After selecting the assets, the fund then writes call options, in which it receives its premium payment, which it returns to investors as a dividend. Additionally, it invests in short-term government treasuries, which also generate income, at a rate of approximately 4% per year.

A look at its current holdings show that the fund’s holdings are mostly in Affirm shares and its call options. Affirm stock price rose by over 7% on Monday after the company extended its BNPL option to Apple Pay in-store transactions, a move that may bring billions in value over time.

Is the ULTY ETF a good buy?

Historical data suggest that the ULTY ETF has been a good investment as its total returns have beaten those of generic funds like VOO and SPY.

It has also become one of the top ETFs in terms of its distributions, which have been relatively stable over time.

Still, this fund has some potential risks, including the ongoing NAV erosion because of its substantial yield. Also, the options section normally caps the upside. For example, it is likely that the fund will not benefit substantially from the recent Affirm stock price surge, as odds are that the target price was reached.

The other risk is that the fund’s performance typically depends on the expertise of the manager. This means that its performance may be affected if the existing manager leaves.

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