This AI-Focused ETF Has a Jaw-Dropping 45% Dividend Yield. Is There a Catch?

Last year, options-focused exchange-traded fund (ETF) manager YieldMax launched the YieldMax Semiconductor Portfolio Option Income ETF (CHPY 2.01%). This actively managed fund aims to provide capital appreciation through a focused portfolio of semiconductor stocks and generate current income. With a cumulative return of more than 150% since its inception and a jaw-dropping current distribution yield of more than 45%, the fund has certainly delivered on those objectives.

Here's a closer look at this ETF's investment strategy and whether it can continue to deliver its monster yield.

A dual strategy to capitalize on the AI boom

The YieldMax Semiconductor Portfolio Option Income ETF, or CHPY, has a dual investment mandate to provide investors with:

Capital appreciation: The fund invests in a select portfolio of 15 to 30 semiconductor stocks. Its top holding is currently Micron Technology (MU 4.90%) at 6.3% of its portfolio. It selects companies based on liquidity, volatility, and market opportunity. This portfolio serves as a base for its options trading strategy while also capturing capital appreciation potential as these stocks rise in value.
Weekly income: The ETF also aims to provide consistent weekly income by selling options on semiconductor stocks.

The semiconductor stocks it holds are some of the biggest beneficiaries of the AI investment boom. For example, Micron recently unveiled a strategic memory storage and supply agreement with Anthropic to help the AI start-up continue scaling in the coming years. Micron's growing importance to the semiconductor sector has driven its stock price up 770% over the past year. CHPY aims to capture this value appreciation by holding a portfolio of top AI stocks.

Strategically using options

The second part of CHPY's strategy is to generate income for investors by selling options on its semiconductor stocks each week. However, instead of writing covered calls, which caps its upside, the fund sells call spreads on its portfolio holdings. A call spread involves selling a call option at a strike price above the stock's current price and buying another call option at a higher strike price. That higher-priced option covers the trade, leaving the owned shares uncovered. These trades generate a net credit (the difference between what the fund received for selling the lower-priced call and paid to buy the higher-priced call), which the fund distributes to investors each week.

For example, the fund currently holds 62,214 shares of Micron. It wrote 613 calls on those shares (each call represents 100 shares) that expire later this week at a $1,125 strike price while simultaneously buying the same number of calls for the same expiration date at a $1,160 strike price. With Micron shares recently around $1,080 apiece, this option trade is on track to expire with a full gain of the net credit.

So, what's the catch?

CHPY's options trades aim to capitalize on the volatility of semiconductor stocks. Given their volatility, the options carry hefty premiums, which the fund aims to harvest by writing out-of-the-money (above the current price) call options, which are then hedged with even further out-of-the-money purchased call options. The desired outcome is that the stock will remain below the written call strike price at expiration, enabling it to keep 100% of the net credit generated by the trade.

However, writing credit spreads isn't a risk-free trade. If the underlying stock, in this case Micron, surges past the written call strike price ($1,125), the trade can incur a loss, capped at the difference between the sold and purchased calls, less the initial net credit received.

Another risk factor is the potential for semiconductor stock volatility to decline as AI hype fades. Lower volatility would result in less lucrative options trades.

Meanwhile, the fund's semiconductor stock portfolio has downside risk. If these stocks sell off, CHPY's price would fall.

A higher risk, higher reward AI income fund

CHPY offers investors upside potential from its handpicked portfolio of semiconductor stocks. Additionally, it provides them with a lucrative weekly income stream from writing call spreads on its holdings. However, that income can vary significantly (its weekly per-share distribution payments have ranged from $0.3454 to $0.7754 since its inception early last year). Meanwhile, the fund's value can fall if semiconductor stocks slump. Given these risk factors, this ETF isn't for everyone. It's best for investors with a high risk tolerance who want to allocate a small portion of their portfolio to cash in on the AI boom.