Nvidia (NVDA) stock price is beating the 21% yielding NVDY ETF

Nvidia (NASDAQ: NVDA) stock price has done well in 2023, helped by the recovering semiconductor market and the soaring demand for artificial intelligence. The stock is moving towards its all-time high of $502.27, giving it a market cap of over $1.27 trillion. It has jumped by over 353% from its lowest point in 2022.

AI and semiconductor recovery

The main reason why Nvidia stock price has surged is its strong market share in the GPU industry. It is also seeing strong traction as industries like autonomous vehicles, cloud computing, and artificial intelligence (AI) boom.

This strength was seen when the company published its financial results in August. Its total revenue surged by more than 101.50% in Q2 to over $13.51 billion. In its guidance, the company noted that it expects its revenue for the fourth quarter to be about $16 billion, helped by data center, gaming, and ProViz. 

Its gross margins are expected to come in at between 71.5% and 72.5% while its operating expenses will be just $2.95 billion. As a result of its strong earnings, Nvidia decided to approve an additional $25 billion share repurchases to add to the remaining $4 billion.

The excellent execution explains why the Nvidia stock price has surged in the past few months. It also explains why most analysts are bullish on the stock. According to Yahoo Finance, analysts who track the company have a hold, buy, or strong buy rating. The average stock target is $628.13, higher than the current $439.

Nvidia has numerous catalysts ahead. It has a strong market share in all fast-growing industries. Also, analysts believe that its revenue growth will continue for a while. The average estimate is that it will make $54 billion in 2023 and $79.52 billion in the following year.

Is NVDY ETF a good buy?

Most people interested in Nvidia do so by investing in the stock directly. Another upcoming approach that is gaining traction among income investors is using active ETFs to generate yield. I recently wrote about YieldMax TSLA Option Income Strategy ETF (TSLY), which focuses on Tesla.

The YieldMax NVDA Option Income Strategy ETF (NVDY) is an ETF similar to TSLY. It is seeing high inflows, with the total assets currently standing at over $167 million despite its 0.99% expense ratio.

NVDY works in the same way as TSLY. First, the developers create synthetic asset with a long exposure to NVDA stock. As such, it does not own the NVDA stock directly. After doing that, they employ a covered call approach, where they sell the call option with the strike price that is between 5% and 15% above the current NVDA stock is. 

Finally, the fund invests a small portion of its cash in US Treasuries and earns a return. These returns tend to do well now that interest rates have surged.

NVDY generates a return when its synthetic Nvidia stock rises. It also generates a return from the covered option. It does that when the shares jump or when they remain in a consolidation phase.

There are two main challenges for this strategy. When the stock falls, the fund tends to generate a loss as the option becomes worthless. If it goes parabolic, it can miss the potential returns.

NVDY is a good fund for earning regular returns. However, in the long-term, investing in Nvidia alone will generate stronger returns if its uptrend continues. As shown above, NVDA’s total return has been stronger than NVDY even though the latter has a 21% yield.

In addition to lower total returns, NVDY has other cons. For one, it has an expense ratio of 0.99%, which is quite huge. In the long term, these costs will always add up. Also, unless you are a passive investor, it is possible to replicate the strategy yourself.