On Thursday, the new YieldMax fund, the YieldMax BABA Option Income Strategy ETF, debuted on the NYSE Arca.
Like many YieldMax ETFs available on the market, BABO seeks to provide current income for its investors. Additionally, the fund’s strategy chases exposure to the share price of the American depositary receipts (ADRs) of Alibaba Group Holding Limited (BABA).
With a net expense ratio of 0.99%, BABO is an actively managed ETF that uses a synthetic covered call strategy to achieve its goals. By using call options, the fund can provide income through option premiums, along with indirect exposure to Alibaba’s share price returns.
Per the fund prospectus, BABO intends to employ indirect exposure to Alibaba regardless of market or greater economic conditions. Additionally, YieldMax notes that BABO does not directly invest in BABA or its ADRs.
Due to BABO’s focus on indirect exposure, the fund’s strategy generally only captures limited returns from potential gains from Alibaba. Inversely, BABO can face the same losses BABA may face if shares decrease in value.
Dynamic Options
For the synthetic covered call strategy, the ETF buys and sells a mix of standardized exchange-traded and Flexible Exchange (FLEX) call and put option contracts. These contracts are based on BABA’s value and price return.
To generate income for the fund, BABO will sell call option contracts on Alibaba. Due to the fund not directly owning BABA, these call options will be sold short. Short-selling call options on Alibaba additionally allows the fund to access limited participation in potential share price appreciation.
Income for investors is aimed to be delivered monthly, in the form of cash distributions. This is largely done though selling call options on BABA, along with investments in short-term U.S. Treasury securities. Additionally, the U.S. Treasury securities will be used as collateral for the covered call strategy.
With the launch of BABO, YieldMax currently has 30 ETFs available in the United States. These funds represent over $4.2 billion in assets under management.
For more information, please visit VettaFi.com | ETF Trends.
