What is CONY ETF?
Different from other ETFs on the market, YieldMax COIN Option Income Strategy ETF (CONY) has been one of the most attractive ETFs in YieldMax family due to its astoundingly high yield.
CONY is an exchange-traded fund (ETF) that focuses on generating high income by utilizing a synthetic covered call strategy on Coinbase stock (COIN). This ETF is part of YieldMax family, which is known for offering high dividend yields through options-based strategy (mainly synthetic covered call strategy, which we explained in another article about the YieldMax ETFs published on IscoreAdvisor.com)
In mid-2023, the ETFs claimed a return of more than 80% in no more than one year since its inception. Overall, it had 79% annualized return in the year 2023, according to data from myplaniq.com.
Similarly, it has about 79% return in the trailing twelve months, while S&P 500 has 19.62% growth.
Source: Seekingalpha.com
As said, CONY is linked to Coinbase, a major cryptocurrency exchange, but it does not directly hold any shares of Coinbase. Instead, like other YieldMax ETFs linked to a single stock, it uses a synthetic covered call strategy to replicate the performance of holding coinbase stock.
Therefore, the so-called “Synthetic Covered Call Strategy” has two parts, synthetic options strategy to replicate Coinbase stock holding, and covered call options strategy to generate yield income. (We explained more in this YieldMax ETFs article.)
The CONY website also put it clearly that “The Fund does not invest directly in COIN.”
As it tracks a volatile asset like Coinbase, the CONY is considered high-risk, given its close tie with the movements of Coinbase’s stock price and the broader cryptocurrency market.
Besides, CONY is also an active-managed fund, meaning professional managers regularly make decisions about buying and selling options contracts to maximize income and manage risk.
Distribution rate and 30-Day SEC Yield
Compared to other dividend ETFs, CONY has a high distribution rate of 80% and 4.61% 30-Day SEC Yield.
(In April, 2024, it had a higher distributiokn rate of 143.43%. Source: Youtube)
Distribution rate refers to the percentage of a fund’s net asset value (NAV) or share price that is paid ou to investors as dividends or distributions over a specific period, typically annually. It is a measure of how much income a fund generates and distributes to its shareholders relative to its value.
In the context of CONY, a high distribution rate of 80% means that 80% of its NAV or income are distributed back to investors as dividends. This is a significant proportion of the fund’s income, indicating a large part of the return to investors comes in the form of regular payouts rather than capital appreciation.
However, due to the same reason, the high distribution rate may lead to a reduction in the fund’s NAV over time.
According to Tradingview.com, the NAV of CONY has been decreasing by 40% this year to date. In contrast, its underlying stock COIN (Coinbase Global Inc) has witnessed an increase of 25% in share price.
CONY Holdings: Negative Weightings
On the other side, from the prospectus and the YieldMax website, you will find that CONY has similar holdings as TSLY, with a significant portion of U.S. Treasury Notes / Bonds as part of its overall strategy. This kind of holding is related to its synthetic covered strategy.
These notes or bonds work as collateral for its synthetic covered calls, to secure the obligactions created by selling options (particularly put options). U.S. Treasury Notes / Bonds are considered highly secure and liquid, making them ideal collateral, with varying maturities and yields.
If CONY needs to quickly raise cash, it can sell its Treasury holdings without significantly affecting the fund’s portfolio, providing liquidity and flexibility to adjust the fund’s position as market conditions change.
The various Treasury securities held by CONY have coupon rates ranging from 0.75% to 3.875%, contributing to the overall income of the fund.
From YieldMax.com
You might also notice that CONY has some negative weighting in its holdings as shown.
This indicates that the fund holds short positions in these securities. In the context of CONY, this means that the fund has sold (or written) those options, which create a liability rather than an asset.
For example, the CONY, as of now, has a short position in the put option called “COIN 09/20/2024 210.01 P” with a market value of around -$98 million, which accounts for -16% of the fund’s net assets.
This large negative value reflects the potential liability the fund has if it need to fulfill the obligation of buying the Coinbase stock at the strike price of $210.01 with expiry date of September 20th 2024.
In comparison, the CONY ETF has also a long position in a call option called “COIN US 09/20/24 C210” with a positive value of $44 million, which accounts for 7%. This indicates the fund could potentially sell Coinbase stock at $210 if the option is expired.
It is noteworthy that this approach is intergral to its high-yield strategy, but also introduces significant risk, as the market value of these short positions can fluctuate, impacting the fund’s overall performance.
Is CONY safe?
Despite the high yield, in the year 2024 to date, the performance of CONY is -0.88%, while that of COIN is 10.68%, as demonstrated by Portfolioslab.com.
The primary risk of CONY is the underlying stock Coinbase Global Inc, a company operating in the highly volatile cryptocurrency market. Historically, Coinbase’s stock price has dropped from $343 at the peak by 90% to about $34 in 2023. It is now fluctuating around $200 after picking up in 2023.
The fluctuation is significantly due to changes in the value of cryptocurrencies, regulatory news, and broader market trends. This volatility can lead to large swings of CONY’s value, by the changing options’ prices.
This volatility could also lead to more active management of CONY, with trades happening more frequently than in typical coveredl call ETFs.
Traditionally, higher market volatility leads to increased implied volatility, which boosts option premiums. Positively, this can benefit strategies like covered calls, where selling options generate more income with more significant short-term price swings.
However, high volatility can cause erratic price movements and makes it more challenging and risky to manage options strategies effectively. What’s worse, if market movements are adverse, especially in naked options or during adjustments, higher volatility can lead to greater losses.
For example, an investor sells a naked put option with a strike price of $150 during a high-volatility period, while the underlying asset is trading at $160. Suddenly, due to market turbulence, the asset’s price drops to $130.
Since the investor doesn’t own the underlying asset, they must buy it at $150 (the strike price) despite the market price dropping to $130, resulting in a $20 loss per share.
Crypto Market
More specifically, the cryptocurrency market is evolving and faces an uncertain regulatory environment. Any changes in regulation or legal challenges (such as those from SEC) could negatively impact Coinbase’s operations and stock price, thereby affecting the performance of CONY.
Along with this, the value of the ETF could be significantly influenced by market sentiment towards cryptocurrency. Negative sentiment can lead to large outflows.
Coinbase makes money by charging for its services. When more people are attracted into the markets by appreciation of these virtual coins, buying and trading, Coinbase makes profits and sees its stock price increasing.
Therefore, as Coinbase’s stock rises and the volatility increases, CONY can see significant yields and appreciation. History shows that crypto market has experienced cycles of higer highs and higher lows.
Moreover, Ethereum has undergone upgrades that makes it deflationary, which would support price increases. There are also more attention in the ETH ETFs as there are news stories about the new cryptocurrency-based ETFs are introduced after winning SEC approvals.
Additionally, more and more updates are coming in the market, for example, XRP was recently not deemed as security after Ripple’s legal battle with the SEC. This could also bring brighter outlook for the market, as it does not have strict regulatory requirements by authorities.
[The core of determining whether an asset is a security lies in the Howey Test. This test assesses whether there is an investment of money in a common enterprise with an expectation of profits primarily from the efforts of others. If these conditions are met, the asset is considered a security and is subject to securities regulations. This classification requires the asset to adhere to strict regulatory standards, including disclosure, registration, and compliance, which can significantly impact how it is issued, traded, and managed.]
With growing interest in the market, this is bullish market in the long term from investment perspective, adding that Web3.0, decentralized finance, metaverse applications are trending too.
Despite the bullish market outlook, the introduction of more cryptocurrency ETFs, like Bitcoin and potentially Ethereum ETFs, could negatively impact Coinbase’s transaction revenue, thereby affecting CONY’s performance.
[As of August 9th, 2024, CONY has an AUM of $620 million. ]
Source: Seekingalpha.com
YieldMax ETFs risks
Besides, like other YieldMax ETFs (like we mentioned in an article about TSLY), CONY also face the risks linked with synthetic covered call strategy and the high yield trap issues. This include the NAV erosion because of return of capital, high expense ratio, dividend sustainability, and capped gains because of covered call strategy.
This ETF is very new, having only been around since August 2023, with its first dividend distribution starting in October 2023. It has paid $19.53 per share in dividends over the trailing twelve months. The most recent dividend, $1.01, was paid on August 8, 2024, and CONY’s dividend yield is 127%, according to stockanalysis.com.
Due to limitations of the covered call strategy, when Coinbase’s price increases, there will always be some profits left on the table that CONY simply cannot capture.
In bearish market, CONY will likely underperform. If Coinbase experiences a prolonged decline, CONY will decline as well, and investors might find themselves trapped in a high-yield dividend situation taht doesn’t compensate for the losses.
Therefore, bullish and flat markets are generally better for CONY’s performance.
It remains to be seen how much and how consistent its payouts will be, especially given the volatility of Coinbase.
Conclusion
Compared to other dividend ETFs, which may have lower distribution rates, CONY’s 80% distribution rate and once 80% annual return is considered high, making it more suitable for income-focused investors but potentially riskier in terms of long-term capital preservation.
The high distribution rates of these ETFs like CONY and TSLY (we explained before) are designed to attract income-seeking investors by offering substantial regular payouts. However, these high yields often come from option premiums, which can include a return of the original investment.
Considering the taxation issue, you could end up paying taxes on your dividend income that cannot cover the losses, so you are losing twice.
However, this doesn’t necessarily indicate a scam, but it does highlight the need for investors to understand the trade offs between high current income and potential long term capital erosion.
In the context of CONY, you also need to have a very good knowledge about the cryptocurrency market but not just the Coinbase stock, which would be more complex than understanding a single stock.
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