Tidal Financial Group and ZEGA Financial drew headlines just a few days ago with the launch of the YieldMax Magnificent Seven ETF (YMAG), which comes on the heels of the decision by Roundhill Investments to rebrand their Roundhill BIG Tech ETF (BIGT) as the Roundhill Magnificent Seven ETF (MAGS) in November of last year.
First and foremost, these are relatively modest funds, with MAGS having about $86 million in assets under management (AUM), while YMAG had about $1 million AUM at launch, although that seems likely to grow in the days ahead given the novelty of the product and the size of some of the other YieldMax offerings (the Tesla fund has $850 million AUM).
Given the year these mega-cap tech stocks have had and the year they could be poised to have in light of Meta Platforms’ (META) earnings report on Thursday night, we thought it would be useful to break these offerings down for our readers and clarify whether it might be worthwhile to invest in either of the two Magnificent Seven ETFs (although more are surely coming).
Before we dive further into the details, we should note that these are very, very (very) different funds with much different investment objectives, and this is not an apples-to-apples comparison. About the only traits these two funds share are their general investment exposure to the Magnificent Seven stocks and their names. We’ll clarify further below.
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Breaking Down the Magnificent Seven ETFs
The Strategy
First up is the Roundhill fund, MAGS, which is an equal-weight fund intended to give investors exposure to each of the Magnificent Seven stocks (MSFT, META, NVDA, AAPL, AMZN, TSLA and GOOGL). The fund invests directly in shares of the underlying companies and reallocates quarterly. In other words, if META is flying high and TSLA is underperforming, shares of META (above the equal weight threshold) are sold and the proceeds are used to buy TSLA during the quarterly rebalance.
YieldMax funds, on the other hand, do not invest in the underlying names at all. YMAG is a fund of funds that owns other YieldMax single-stock ETFs. Instead of buying MSFT, it buys MSFO; instead of TSLA, it holds TSLY.
Each of those YieldMax ETFs attempts to maximize distributions through a synthetic covered call strategy on the stock in question. If you’re familiar with Andy Crowder’s Poor Man’s Covered Calls, it’s very similar to that approach.
The YieldMax funds use a combination of buying slightly longer-dated calls (up to a year per the fund’s literature, but the current long holdings only go out to March in MSFO) and selling out-of-the-money shorter-dated calls (0-15% OTM per fund literature; current short positions expire in February) to replicate a covered call strategy. It also sells puts to balance deltas/generate additional returns.
Most of the assets in the YieldMax funds are held in cash/Treasurys to secure the options trades.
Brass tacks, MAGS gives you balanced exposure to all the Magnificent Seven stocks while YMAG uses them as a foundation to deploy a more complicated yield-generating options strategy.
The Performance
MAGS is up about 11% since the conversion at the end of November; YMAG isn’t old enough to have any performance or distribution data of its own, although the single-stock YieldMax funds have annualized distribution rates from as low as 15% (for GOOGL; GOOY is the ETF ticker) to as high as 75% (for TSLA; TSLY is the fund ticker).
Future performance of MAGS will be entirely dependent on the performance of the Magnificent Seven stocks, whereas distribution rates for YMAG will also be dependent on the volatility premium of options tied to those stocks.
The Costs
Fund expenses for MAGS clock in at 0.29%, which is neither particularly high nor particularly low for an ETF.
YMAG, on the other hand, comes with a 0.99% management fee, which is high but not inappropriate given the strategies being implemented and the turnover in the fund.
The Risks
Both funds will perform better in a bull market for the Mag Seven, and the primary risk for either is a decline in the underlying stocks.
What I’ll call the “catastrophic risk” is higher for YMAG than it is for MAGS because of the synthetic covered call strategy; whereas MAGS’ Microsoft holding would decline 95% if MSFT fell to 20 from where it’s currently trading above 400, a catastrophic decline like that would likely render YMAG’s MSFO position insolvent.
Ideally, the fund would be closing out short put positions on the way down and that wouldn’t be the ultimate outcome, but that risk technically exists.
Because it’s a synthetic covered call, YMAG also caps your upside (like a covered call would) and won’t participate fully in the momentum of the underlying stocks.
The bigger risk, which is shared by both Magnificent Seven ETFs, would be the risk that those seven stocks decouple. The Magnificent Seven stocks are connected by narrative more than anything else; Tesla and Amazon don’t exactly have a ton in common.
If the semiconductor sector falls out of favor and you’re overinvested into the Mag Seven and have exposure to NVDA there, should you pare down your exposure to semis elsewhere because you want to maintain your position in META and AMZN? Or do you close out some of your Magnificent Seven ETF and reduce your exposure to otherwise healthy sectors?
The “right” answer is probably to reduce your Mag Seven exposure and then allocate some of the proceeds to individual stocks you’re losing exposure to. That seems like a lot of extra portfolio management work.
The Big Question
So, should you buy a Magnificent Seven ETF? Maybe. (We know, that seems like a cop-out.) You likely already have a lot of exposure to these stocks through your existing large-cap stock holdings if you own any S&P 500 or U.S. large-cap mutual funds or ETFs.
If you don’t and are looking to ride the Magnificent Seven train while it’s still got a ton of momentum, MAGS does something that you can pretty easily do yourself: Buy seven stocks and periodically rebalance them.
That said, if it’s cost-prohibitive to go out and buy the position piece by piece (or if you’d prefer to just pay the fund manager 0.3% to do it for you), MAGS strikes us as a reasonable way to add a targeted stake in the Mag Seven trade.
YMAG is a tougher call. It serves two masters by tacking the synthetic covered call trade onto the Magnificent Seven narrative. As you saw in the distribution disparity mentioned above, if you’re looking for a synthetic covered call trade, the fact that it’s a Mag Seven fund means you’re not necessarily getting the best distributions while also capping your upside to the Mag Seven momentum.
You’re probably better off targeting an individual YieldMax ETF instead of lumping seven together in service of a narrative.
Or, if you’re inclined to implement a similar strategy on your own, without being beholden to a fund manager, take a look at Andy’s Cabot Options Institute Fundamentals service. It uses a similar synthetic covered call strategy that just looks to generate the best returns without being handcuffed to a narrative.
For more of our coverage of the Magnificent Seven stocks, read “What’s Next for the Magnificent Seven Stocks?”
To learn more about Poor Man’s Covered calls, read “The #1 Investment Strategy for 2024.”
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