Zero-Day Options ETFs
Recently, a new type of ETF hit the market. Its astronomically high dividend rate has drawn in a lot of investors. The other day one of our Wanderer members told us his son-in-law had been investing in these ETFs and was excitedly telling everyone at dinner about the 30%+ dividend rate he was receiving. Best of all—he was telling everyone—it's practically risk-free.
When I hear the words RISK and FREE used anywhere in the vicinity of each other my hackles get raised. I immediately dug into these Zero-Day options and it didn't take long for me to realize that these are not a product that serve any useful purpose for anyone except the company collecting the fees for running it.
What Is a Zero-Day ETF?
From the Defiance ETF homepage:
QQQY aims to achieve consistent and outsized monthly yield distributions for investors coupled with equity market exposure to the Nasdaq-100. QQQY is an actively managed exchange-traded fund (“ETF”) that seeks enhanced income, constructed of treasuries and Nasdaq-100 index options. The strategy’s objective is to generate outsized monthly distributions by selling option premium on a daily basis. The fund uses daily options to realize rapid time decay by selling in the money puts with 0DTE.
So, essentially what they are saying is that they are selling in-the-money options expiring that day in order to collect the theta (time value) of the option. It's assumed that they are hedging against those positions, but the website doesn't explicitly state that, so it's hard to say for sure.
Let's go ahead and assume that they are hedging their short put positions at the same time they are making the trade. If that were the case, and there were a way to PERFECTLY hedge, and the market never had a sharp move causing the hedge to come out of line and need to be adjusted, and, and, and...
Sorry, there is just no way that this actually works. Sad, I know, but there is still no free lunch.
But wait, you say, "QQQY has a trailing dividend yield of 62% right now! That means If I invest $1,000 I'll get $620 back in just the first year. There's never been anything like it!"
Okay, let's look. In the past year QQQY has paid dividends dropping from $1.10, to $1.00, to $.93, to $.62. That is not the direction we like to see dividend payments trending.
Let's take a look at a chart. Surely QQQY must be greatly outperforming a similar investment in QQQ, right?
This is a chart showing the returns of QQQY versus QQQ (orange line) over the past three months. On the right side are the returns over that time, adjusted for inflation.
You can see that QQQ has a return of 10.73% over this time. Now move your eyes down that side and you'll find that QQQY has a return of 5.69%.
If you had invested $1,000 in QQQ three months ago you would have $1,107 today.
If instead you had put that $1,000 in QQQY you would now have $1,057.
A 5% underperformance in just three months is a big deal, especially for something that is being touted all over the internet as risk-free.
But QQQY isn't the only Zero-Day Option ETF out there. Let's take a look at a couple others. Maybe QQQY is an underperforming outlier.
IWM is an ETF that tracks the RUT (small-cap) index. IWMY is a zero-day option etf trading IWM options for its strategy. Strategy might not be the right word for this kind of performance.
Here's another dividend adjusted chart. Let's see how IWMY has stacked up against IWM. IWMY hasn't been around very long—not even three months yet—so you'd expect it would be performing pretty much in line with IWM. Instead...
IWM has a nice return over this time of 15.37%, while IWMY has managed just 5.41%. A 10% underperformance in just its first three months in existence.
These ETFs aren't stopping with index funds, though, they are even attaching themselves to individual stocks. Here's a zero-day option ETF trading Tesla options. This one has been around a little longer. And drumroll please...
TSLA stock over this time period (just a bit over a year) is up 16.71%.
TSLY for the same period? Down 3.12%. That's a nearly 20% underperformance. So far.
Conclusion
To sum up, QQQY is charging a very high .99% fee to run this fund. They are running this knowing full well that it will continuously decline in value until eventually no money remains. It will only be able to keep running if more money is invested in the fund, at which point they can continue collecting .99% in order to gradually lose all of that money. That cycle will repeat until investors wise up and no more money is invested.
So why do they exist at all? The answer is that most investors don't understand what is happening. They see their big monthly dividend coming in and don't realize that more than that is going out in the form of a tumbling ETF price. The fund managers, meanwhile, are reaping huge profits. TSLY currently has $850 million in AUM. That means investors are paying them $8.5 million per year for them to make a bunch of trades that will lose money over time. Yieldmax, the company that runs TSLY, has dozens of these funds.
What these funds are telling you, in so many words, is that they will give you THREE quarters if you give them just ONE dollar. They are hoping you are stupid enough to think 3 must be better than 1.
Bottom line: DO NOT GIVE MONEY TO ANY ZERO DAY OPTION ETF
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