Can Reader Feedback Change My Mind?
I have an unpopular opinion. Ok, I probably have more than one unpopular opinion. That’s ok, too, as these are the things that make me unique. One of my contrary opinions, in particular, is about ETFs (exchange-traded funds).
Since 1993, ETFs have enabled investors to gain exposure to different asset classes without having to buy individual stocks or bonds. They are structured similarly to mutual funds but can be bought and sold during the trading day just like a stock.
Today, there are thousands of ETFs available. Their themes or objectives can range from tracking an index to investing in a specific industry.
Now, I understand the argument that a basket of stocks can lower your risk. However, the tradeoff is that less risk can also limit your upside. Just like the losers are offset by the winners, the gains of stellar performers can be watered down by other mediocre performers.
Personally, I don’t want to own a basket of stocks. I want to pick my own… especially since ETFs charge fees for running the funds. You can find the size of this fee by looking at the fund’s expense ratio.
This doesn’t mean that I haven’t used ETFs in specific cases. An ETF can give us access to something that would be more challenging otherwise. One example is foreign stocks. These can be thinly traded on the OTC market, not traded on the US exchange at all, or hit you with a dividend withholding tax. Instead, I’ll look for an ETF for that exposure.
Another example is when there is a new trend of up-and-coming technology. If I’m not quite sure who the winners and losers will be, I’ll turn to a fund. Sometimes, I’ll even get to collect a dividend while I wait.
I’m half convinced that you guys want to change my mind about ETFs. I have two of them on my watchlist that you all recently asked me to check out. So, let’s see if any of these can change my mind today…
1. 2x Bitcoin Strategy ETF (BITX)
Income probably isn’t the first word that comes to mind when you think about Bitcoin. But this fund that John asked me about pays a monthly distribution with a current annualized double-digit yield. So, I had to check it out.
The first thing I noticed about this ETF was the warning my broker (Charles Schwab) flashed when I clicked on the shares.
You guys already know that I like long-term holdings. This warning makes it clear that holding long-term goes against the objective of the fund. To check this further, I clicked on the prospectus. This is always the place to start when looking at an ETF. Here’s what it says:
“BITX seeks daily investment results, before fees and expenses, that correspond to two times the return of bitcoin for a single day, not for any other period. A single day is measured from the time the Fund calculates its net asset value (NAV) to the time of the next NAV calculation.”
It also warns that the return for periods longer than a single day will be the result of the return for each day compounded and may not result in the stated double the return of Bitcoin. It continues by advising that BITX is not intended to be used by, and is not appropriate for, investors who do not actively monitor and manage their portfolio, aka someone like me who wants boring investments so I can be out enjoying other things.
There are two more things we need to know to make an informed decision: How does it achieve a 2X return and what are the fund’s expenses?
The main strategy uses Bitcoin futures contracts. Trading futures is something I would not do on my own and would use an ETF instead. The fund also holds collateral investments that may include Treasuries.
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The fund can also use other investments to achieve its goal. It does all this for an expense ratio of 1.85%.
I’m still not sure how you’d collect income if you’re only holding shares intraday. But this is definitely interesting if you’re looking for income from Bitcoin.
2. YieldMax ETFs
This one is a little different since Jim asked me about a group of funds instead of a single fund. The objective for this group of funds is to generate monthly income. It does this by using options-based strategies on one or more underlying stocks. The funds specifically try to generate “compelling yields” from stocks that are not typically associated with monthly income.
I don’t talk about it often, but generating income with options is another area where I have considerable expertise. Selling covered calls or cash-secured puts can sizably boost your income without adding a ton of risk. You can even earn income from stocks that don’t pay a dividend.
There are two challenges with executing a successful options strategy yourself. First, it will require more time and attention to the market than a typical “boring” dividend strategy. Second, it will tie up more capital since each option contract covers 100 shares of the underlying stock.
YieldMax lists 42 funds including some based on Nvidia (NVDA), Airbnb (ABNB), Walt Disney (DIS), and Tesla (TSLA). The expense ratios seem to be just 0.99%, which isn’t bad if you want the benefits from options without all the work.
My conclusion after looking at these ETFs?
Both of these are examples of funds that do more than simply holding a basket of stocks. In my opinion, that could be worth paying the fund’s higher fees.
I’d love to hear if you’ve collected income from any of the ETFs I covered above, or if you disagree with my opinion on ETFs. And let me know if you want to hear more about using options to earn income.
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For more income, now and in the future,
Kelly Green
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