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investor clinic

What is your opinion of single-stock exchange-traded funds such as those offered by the U.S. company YieldMax ETFs that advertise double-digit distributions? These ETFs seem like a good way to invest in some of the big names like Nvidia Corp., which I can’t afford directly, and kick up my dividend stream.

With AI chip maker Nvidia soaring to fresh highs this week on the strength of yet another blockbuster earnings report, many investors have come down with a serious case of FOMO. But if you’re itching to get in on the rally in tech stocks, these ETFs aren’t the way to do it.

YieldMax funds generate income by selling call options on individual stocks such as Nvidia, Tesla Inc. TSLA-Q, Microsoft Corp. MSFT-Q and Netflix Inc. NFLX-Q As YieldMax explains on its website, however, its ETFs do not invest directly in these securities. What’s more, because of the options strategy the company employs, any gains in the underlying stocks will be capped for holders of its ETFs.

Consider the YieldMax NVDA Option Income Strategy ETF NVDY-A, which writes options on Nvidia NVDA-Q shares. The ETF posted a total return – from share price gains and distributions – of about 24 per cent for the six months ended Jan. 31. That sounds impressive, until you compare it to the return of about 32 per cent for Nvidia shares over the same period. That’s the problem with many options-driven yield strategies: They often leave money on the table.

Similarly, the YieldMax MSFT Option Income Strategy ETF MSFO-A, which writes options on Microsoft Corp. shares, had a total return of 15 per cent for the three months to Jan. 31. That compares with a total return of 18 per cent for Microsoft shares.

I’m not suggesting that you should invest in Nvidia (or Microsoft) directly, but I don’t understand your comment that you “can’t afford” to do so. Yes, at nearly US$800 a share, buying 100 shares of Nvidia would cost you close to US$80,000. But there’s no reason you couldn’t buy five, 10 or even a smaller number of shares.

However, a more prudent approach would be to purchase a low-cost index ETF that tracks the S&P 500, which has a roughly 30-per-cent weighting in technology stocks, including Nvidia and all the other big-tech names. You won’t get a huge yield – the BMO S&P 500 Index ETF ZSP-T, for instance, currently yields about 1.2 per cent – but you will achieve better diversification and participate in virtually all of the upside if stock prices continue to rise. You’ll also keep your costs low, thanks to a management expense ratio of just 0.09 per cent for ZSP and similar products such as the iShares Core S&P 500 Index ETF XUS-T.

In general, investors are too easily seduced by investments that offer outsized yields. Products like those offered by YieldMax appeal to investors who are looking for a shortcut to build wealth, but the process can’t be hurried. There is no substitute for building a diversified portfolio and letting time and compounding do their work.

When I use the “compare” function on globeandmail.com’s stock-charting tool to graph two stocks, do the percentage returns include dividends?

No. As with most third-party financial websites, stock charts on globeandmail.com are based on price only, excluding dividends.

An exception are the performance charts published by mutual fund and exchange-traded fund companies that show the “growth of $10,000″ invested in their securities. These charts depict total returns, including dividends, and are after expenses. The same is true of performance tables posted by fund companies. To find total returns for individual Canadian stocks, try the free compound returns calculator at canadastockchannel.com. For U.S. stocks, check out the calculators at dqydj.com

If one has made substantial gains on various stocks, is it better to cash in and take some profit or let it ride? I keep reading different answers to this question. Is there a general rule of thumb for this, or what does logic tell us?

The answer depends on many factors. If the stock has risen to the point that it accounts for a substantial portion of your portfolio – say, 10 per cent or more, just to pick a round number – trimming your position and deploying the cash elsewhere would help to control your risk. If the stock’s price-to-earnings multiple (or other valuation metric) has become excessively stretched, or if you have become less confident about the company’s growth prospects, these would be additional reasons to consider cutting back. You might also want to take into account the capital gains tax implications, if any, of selling. On the other hand, if you still like the company’s prospects, the valuation is reasonable and the stock doesn’t account for an outsized weighting in your portfolio, you may want to hang on. You won’t necessarily get it right every time – you might sell a portion of your position only to watch the share price continue to rise – but controlling your risk is the name of the game here.

E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 17/04/24 3:57pm EDT.

SymbolName% changeLast
NVDA-Q
Nvidia Corp
-3.87%840.35
TSLA-Q
Tesla Inc
-1.06%155.45
MSFT-Q
Microsoft Corp
-0.66%411.84
NFLX-Q
Netflix Inc
-0.62%613.69
NVDY-A
Yieldmax Nvda Option Income Strategy ETF
-3.61%25.61
MSFO-A
Yieldmax Msft Option Income Strategy ETF
-0.78%21.63
ZSP-T
BMO S&P 500 Index ETF
-0.9%75.59
XUS-T
Ishares Core S&P 500 Index ETF
-0.83%85.95

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