NVDY ETF has a 29% yield: Is it better than NVDA stock?

The YieldMax NVDA Option Income Strategy (NVDY) ETF surged to a record high this week as Nvidia continued its strong bull run. The ETF soared by more than 17% on Thursday, reaching its record high of $28.60. It has risen by almost 100% from its lowest point in May 2023.

NVDA vs NVDY: which is a better buy?

Nvidia has made headlines this week after the company published strong financial results. The company said that its total revenue soared by more than 245% in the fourth quarter, helped by the rising demand for artificial intelligence (AI). 

Further, the company announced that demand for its data center chips will continue growing in the long term. Its annual revenue in 2023 stood at over $64 billion. And analysts expect that its revenue will surge to $109 billion and $129 billion, respectively.

Nvidia is also becoming a highly profitable as its earnings per share (EPS) will move from $24.52 and $29.30. 

Therefore, there are two main ways of investing in Nvidia as analysts believe that it could become a $3 trillion company soon. Besides, it has a leading market share in the fastest-growing technology in the market.

The first and most direct approach is to invest in Nvidia stock, which has jumped to over $745 as it became the most crowded entity. The surge in the stock has made its dividends almost negligible with the yield standing at 0.02%

On the other hand, one can invest in the YieldMax NVDA Option Income Strategy ETF, which I wrote about here. NVDY is an ETF that is similar to the popular TSLY ETF, which I have also covered before.

It has over $181 million in assets and an expense ratio of about 0.99%. On the positive side, the ETF has a dividend yield of 29.6%, which is higher than the risk-free return of about 4.3%.

How NVDA ETF works

NVDA vs NVDY

NVDY is an ETF that aims to benefit from the uptrend in Nvidia’s stock rally while limiting downside risks. It does this by buying a stake in Nvidia and then selling its synthetic call options to generate a return.

A call option is a transaction that gives a person the right but not an obligation to buy an asset. For example, assume that the call price is $700. If the stock drops to $690, the option is worthless since the counterparty can buy it at a cheaper price in the open market.

On the other hand, if the stock rises to $700, the ETF benefits from both the premium and the return. However, if it surges, as it did on Thursday, it means that the gains will be capped. This is a major risk for the fund.

NVDY ETF can also benefit when Nvidia’s shares moved sideways during the options process since it will still pocket the premium. The fund uses these premium payments to distribute to its shareholders every month.

Therefore, a question on which is the better investment between NVDA and NVDY has always been there. Some analysts recommend shorting NVDA and going long NVDY. 

However, I believe that shorting Nvidia is a highly risky situation, especially now that it has become a crowded stock. Since NVDA has more upside, investing in it directly seems like a better idea than NVDY even with its strong monthly distributions. As shown above, NVDA has a long record of outperformance.