IWMY: The Flawed StAs an income investor, it’s crucial to dissect the strategies of funds promising high yields. One such fund is the Defiance R2000 Enhanced Options Income ETF (NYSEARCA
), which boasts a staggering 110.9% yield. However, the reality is that IWMY’s strategy leads to capital erosion, resulting in underperformance compared to the Russell 2000 and other covered call ETFs like FEPI.
In this analysis, I will delve into why I believe IWMY’s option strategy is fundamentally flawed and why its high yield is more illusion than reality.
The Allure of High Yield
The idea of a 110.9% distribution yield is enticing, isn’t it? It’s almost like a dream where you could potentially double your investment in less than a year.
- Investment Dream: Imagine putting in £10,000 and walking away with £20,000 in just 12 months. But that’s not the full story.
While IWMY continues to promise incredible dividends, the underlying reality is that its share price has plummeted nearly 40% since launch.
- Total Return Dilemma: Including dividends, the total return stands at 19.13%, which sounds good until you compare it to the performance of the iShares Russell 2000 ETF (IWM).
When we stack up IWMY against its benchmarks, we see it’s not only failing to keep pace with the Russell 2000 but also witnessing significant capital decay. If IWMY could preserve investor capital while offering these yields, it might justify its existence. But the fact is, it cannot.
Flawed Portfolio Strategy
Managed by Toroso Investments, IWMY employs an in-the-money option strategy designed to generate income to fund those hefty distributions. Yet, a closer inspection reveals a problematic strategy:
- Low Expense Ratio: With a surprisingly low expense ratio of 0.99%, one would expect better performance.
However, the portfolio strategy appears fundamentally flawed.
- Lack of Exposure: While claiming to mirror the Russell 2000, IWMY’s holdings are primarily US Treasury Notes, lacking direct exposure to the underlying index.
The strategy relies on collecting premiums from options, but here’s the kicker:
- Short Expiration Dates: The options used have expiration dates as short as one trading day. This severely limits the opportunity for any price gains.
Why Short Expiration Is a Problem
Short-duration options may offer higher income but at a cost. Here’s why:
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Limited Upside Potential: The ultra-short expiration caps potential price appreciation. While IWMY can alternate between at-the-money and in-the-money strategies, the short duration means little time for capital growth.
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Continual Share Price Decline: As the share price continues to slide downward, investors are left with a sinking ship.
In contrast, other covered call ETFs like REX FANG & Innovation Equity Premium Income ETF (FEPI) adopt a different approach:
- Out-of-the-Money Calls: FEPI employs out-of-the-money calls against a diverse portfolio. This strategy allows for more significant capital preservation and growth potential, even if the yield isn’t as eye-popping as IWMY’s.
Dividend Risks in IWMY
One attractive aspect of IWMY is its monthly dividend payments, adding a consistent income stream to your portfolio.
- Monthly Income: The latest declared monthly dividend is £3.671 per share, a sweet incentive for income-seeking investors.
However, the catch lies in how sustainable these dividends are.
- Unsustainable Distribution: Most recently, a shocking 78% of the distributions have been funded through return of capital, not net investment income.
This raises a glaring red flag:
- Deteriorating NAV: If the fund constantly pays out more than it earns, it’s a recipe for disaster. The more you pay out without covering costs, the more the net asset value (NAV) deteriorates.
The Bottom Line
In summary, IWMY’s in-the-money option strategy with ultra-short expiration dates is indeed flawed.
- Consistent Price Decline: The price has steadily decreased since inception, with a history of capital erosion.
While the fund may suit certain investors in a flat market, the risks simply outweigh the rewards for most.
- Poor Capital Retention: IWMY has a track record of failing to retain investor capital, and its strategy lacks the robustness found in other options.
When you compare IWMY to more effective funds like FEPI, the differences become apparent. FEPI better preserves capital while allowing for some upside price movement.
Ultimately, IWMY’s promised 110% dividend yield is less about actual returns and more about creating an enticing headline.
As it stands, I cannot recommend IWMY to income-focused investors.
Conclusion: Rating IWMY as a Sell
IWMY represents a classic case of a fund that looks appealing on the surface but is underpinned by a strategy fraught with issues. The combination of an unsustainable distribution model and a flawed approach to options trading raises serious concerns. Therefore, I am rating IWMY as a sell.rategy Behind Capital Erosion
