NVDA Vs. NVDY: The Better Nvidia Stock Buy For Your Investing Style

Forbes

3 days ago

Nvidia is the crown jewel of the AI boom. But how you choose to invest in it, either directly through NVDA stock or indirectly via the NVDY covered call income ETF, reflects your risk appetite, time horizon and definition of returns. This article explores which option (NVDA stock vs. NVDY) is a better fit for your portfolio and what your choice reveals about your investor persona.
What Is YieldMax's NVDY?
The YieldMax NVDA Option Income Strategy ETF (NVDY) is an actively managed fund that does not invest directly in Nvidia shares, but delivers a far higher income yield vs. NVDA. The fund's staggering trailing twelve-month (TTM) distribution yield of nearly 80% stems from a unique strategy that generates monthly income through options without actually owning NVDA stock.
To achieve this, NVDY implements a 'synthetic covered call' strategy by which it
To generate monthly income by selling short-term covered calls, NVDY first needs a long exposure to NVDA stock. Rather than buying NVDA shares outright, NVDY creates a cheaper, synthetic long position by
This combo allows NVDY to simulate NVDA stock's price moves, without actually buying the stock. These call and put options typically have durations of one to six months and strike prices near NVDA's current price at the time these option contracts are executed.
The synthetic long position provides NVDY with exposure that is nearly identical to owning NVDA stock. If NVDA rises, the call gains in value and if NVDA falls, the put incurs a loss. If NVDA stays flat, typically both options may expire worthless, and the fund may lose the cost of the call, but this will be offset by the premium received from the short put.
Suppose NVDA stock is currently trading at $200/share. NVDY buys a call option with a strike price of $200 (at-the-money) by paying a premium of $15. (Premiums vary depending on volatility and expiration, and the $15 figures here are for illustrative purposes.) This gives NVDY the right to buy NVDA at $200. If NVDA rises to $250, the call option's value would increase to $50. Subtracting the $15 premium paid, the net profit on the call is $35. As part of the synthetic strategy, NVDY also sells a put option with a $200 strike price, receiving a $15 premium. This gives it the obligation to buy NVDA at $200 if the price falls below that level. If NVDA drops to $150, NVDY is forced to buy at $200, incurring a $50 loss on the put. After subtracting the $15 premium received, the net loss is $35. These call and put options together form a synthetic long position, mimicking the payoff of directly owning the stock.
Although synthetic ownership is more complex than buying shares directly, it is significantly more capital-efficient. For example, buying 100 shares of NVDA at $200 each would require $20,000 upfront. A synthetic long position created by buying a call and selling a put at the same $200 strike can replicate this exposure. If the premiums for both options are around $15 each, the net upfront premium may be close to zero. Since each options contract typically represents 100 shares, this setup simulates $20,000 of stock exposure with little or no net premium paid.
However, this does not mean the position is free. The short put side of the trade introduces significant downside risk and typically requires substantial margin or collateral. While the strategy uses less capital than directly purchasing the stock, margin requirements and potential losses can be huge. This is an oversimplified example meant to illustrate the concept of capital efficiency. In practice, actual capital requirements and risk exposure will vary depending on market conditions and brokerage policies. Investors don't need to worry about this nitty-gritty, NVDY fund managers will handle the complexities.
NVDY then sells calls against this synthetic long position to generate income from premiums. These call options are typically short-term (expiring within one month or less) and are written at strike prices 0–15% above NVDA's current price at the time. If NVDA's price goes up, NVDY makes gains up to the strike price, but anything above that is capped, because the fund sold away that upside in exchange for income. If NVDA stays flat or dips slightly, NVDY retains the premium from selling the call options. This is its main source of monthly income.
NVDY also holds short-term U.S. Treasuries that not only serve as collateral for the options in connection with its synthetic covered call strategy, but also earn some interest.
NVDY also employs a 'Covered Call Spread' strategy—a more nuanced variation of the traditional covered call—used when it anticipates a sharp short-term rise in NVDA's price or when market conditions make spreads more advantageous than outright calls. In this strategy, NVDY sells a call option while simultaneously buying a call option with a higher strike price but the same expiration date. This approach still generates income and, if NVDA's price surges, allows NVDY to participate in more upside than a regular covered call would.
How Does NVDY Differ From NVDA Stock?
NVDA stock and NVDY are both Nvidia-focused investments but serve different goals: NVDA stock is regarded as a growth superstar, while NVDY is designed as a tactical income generator.
For NVDA investors, gains and losses move in lockstep with the stock price. But, NVDY's returns, shaped by its synthetic long structure, follow a more complicated path.
So, we notice that drawdowns are more or less similar for NVDA and NVDY, but gains are capped for NVDY.
So, why invest in NVDY at all?
Because of the outsized income yield from NVDY that far surpasses NVDA's.
NVDY pays varying monthly distributions, while NVDA pays a penny in quarterly dividends.
On a TTM basis, NVDY has paid distributions totaling $14.04/share, equating to 78.7% distribution yield based on NVDY's last closing price of $17.85. This far surpasses NVDA's 0.02% forward yield or annual payout of 4 cents/share on a forward basis.
Price performance and Total Returns (including dividends/distributions):
Even with NVDY's hefty monthly distributions, NVDA has delivered stronger total returns.
NVDY's monthly payouts are a mix of return of capital (ROC) and ordinary income (such as option premiums and interest from Treasuries)
For example:
Why this breakdown matters: Return of capital isn't taxed when received. Instead, it reduces your cost basis in the ETF, which can increase taxable capital gains when you sell.
Illustration:
Once your cost basis is reduced to zero, any further ROC distributions are treated entirely as capital gains for tax purposes.
The income portion of the payout, however, is taxable in the year received. For July, this would mean the remaining 63% of the distribution was taxable income.
Expense Ratio: YieldMax lists NVDY's gross expense ratio as 0.99%, while many third-party sites like Yahoo Finance report the net expense ratio as 1.27%. That means an investor pays $127 annually for every $10,000 invested in NVDY. Let's say an investor bought 1,000 shares of NVDY a year ago at around $24/share:
Even after accounting for the $304.80 annual fee (1.27% of $24,000), the net income is still exceptionally high. In other words, the expense ratio barely dents NVDY's income advantage.
Since its inception on May 10, 2023, when it was trading around $20, NVDY has paid out $32.71 in distributions. Investors who purchased one share at launch would have recovered their full initial investment and realized an additional $12.71 in income. It is important to note that NVDY shareholders do not receive any dividends paid by Nvidia (NVDA) directly. But with these juicy payouts from NVDY, no investor would have missed much.
When it comes to NVDA, the math is simple. You'll need about 10× the cost of an NVDY share to buy one share of NVDA. Sell NVDA in a taxable account, and you'll owe capital gains taxes on your profits. Sell it in a tax-advantaged account like a 401(k), and those taxes can be pushed to another day.
NVDY Vs. NVDA: Advantages And Risks
Lower Entry Cost: NVDY trades at roughly one-tenth the price of NVDA stock, making it more accessible for smaller investors.
Capital Efficiency: Through its synthetic long position strategy, NVDY can mimic exposure to thousands of dollars' worth of NVDA stock with a minimal capital outlay.
Attractive Yields - NVDY's covered call strategy generates eye-catching yields, appealing to income-focused investors. NVDA on the other hand is coveted for its growth potential rather than dividends.
Faster Capital Recovery: NVDY's hefty and frequent payouts can help investors achieve 'house money' status quickly, recovering their initial investment through distributions. This can substantially de-risk the investment. NVDA requires selling shares to realize profits.
Occasional Upside Participation: when NVDA stock is expected to rally in the short-term (because of a sell-off or some positive development) NVDY employs the 'Covered Call Spread' strategy, allowing more upside capture versus a standard covered call if NVDA's price surges.
Asymmetric Downside: NVDY's synthetic long structure caps upside but leaves investors fully exposed to NVDA's downside. High monthly income may not be able to offset losses from a sharp NVDA correction.
Investor Exodus: Significant price drops in NVDY can trigger investor outflows, lowering Assets Under Management (AUM) and making it harder to generate option income efficiently, thereby creating a negative feedback loop.
Distribution volatility: While NVDA offers paltry dividends, NVDY's monthly payouts can fluctuate sharply — largely because they rely on option premium income and include return of capital. When NVDA's implied volatility drops or NVDY's Net Asset Value (NAV) erodes from repeated ROC payouts, the ETF's distributions could shrink.
Opportunity Cost: Historically NVDA's returns have outpaced NVDY's significantly. Simply holding NVDA stock may generate greater total returns than NVDY, especially during strong bull runs in tech.
NVDA Or NVDY — Which Investor Are You?
If you are betting on Nvidia as a core pillar of an AI-driven future, and seek full participation in Nvidia's growth story — you're a Growth Chaser — you pick NVDA stock.
If you are comfortable with capped upside and prioritize monthly income, you're an Income Alchemist — you choose NVDY to tactically monetize volatility and generate consistent yield.
If you are looking to blend growth and income — gaining exposure to Nvidia's long-term upside while securing a steady income stream, you hold both: NVDA for capital appreciation and NVDY for monthly payouts. That makes you the Hedged Optimist.
Bottom Line
In my view, NVDA stock remains the superior play with its compelling long-term returns despite the meager dividend. The NVDA stock has clearly demonstrated resilience by rebounding and reaching new heights after every sharp correction, highlighting its structural strength. On the other hand, NVDY's low capital requirements, exceptional yield and the potential to recover capital in a reasonable time frame are alluring. However, the risks of asymmetric downside and NAV erosion — potentially shrinking the very dividends investors seek — make NVDY better suited as a tactical, smaller allocation in a portfolio. By contrast, NVDA stock deserves to be a core holding and investors may consider accumulating on any weakness, although past performance is no guarantee for future results.