MSTY Through A Bear Regime: What The First Full Cycle Reveals

Summary I maintain a Sell rating on the Yieldmax MSTR Option Income Strategy ETF due to persistent structural issues and underwhelming total return performance. MSTY's methodology remains unchanged despite MSTR's decline; aggressive yields and NAV erosion continue, with no material portfolio or option strategy improvements. The recent reverse split and waning AUM highlight investor exhaustion and reinforce concerns about long-term viability and active management demands. MSTY fails to deliver meaningful alpha or volatility reduction versus MSTR, making it unsuitable for long-term or MSTR-bullish investors. I maintain a Sell rating on the Yieldmax MSTR Option Income Strategy ETF ( MSTY ). I have been warning about structural issues in the approach and its implications since March last year, at a time when interest in this high-yield product was picking up. Since August peaks, the interest has been waning a bit, and recent AUM activity suggests investor exhaustion since October. Other than MSTR's fall since October, nothing has actually changed in the ETF's structure or methodology. This analysis actually dives deeper into MSTY's performance in a first regime since launch when MSTR has really collapsed and finds the performance in line with expectations in such a regime. Investors who flocked to MSTY in mid 2025 were always riding MSTR risks, and if they were indeed bullish on MSTR, then MSTY was not the best tool to monetize it. In fact, MSTY has done relatively well (as is expected) during this fall in MSTR from October 2025. Since my last coverage, another important development in MSTY is the reverse split that has potentially sent negative signals, along with a crashing share price (in an unsupportive environment). NAV erosion and high yields go hand in hand, and that is a concern, but I am more worried about total return underperformance - that has importantly remained where it was since inception. Unlike in the case of ULTY , where positive changes have emerged in terms of the underlying portfolio selection, option strategy changes, and even some yield moderation, no material changes were visible in MSTY when I checked its holdings and trades. MSTY does not have scope for portfolio level changes like ULTY (given it rides a single stock). But yields and option strategies (like the introduction of net put positions like in ULTY) could have changed - and they have not, as per what a look at the portfolio reveals. Waning Appetite The waning appetite phenomenon I talked about at the start is clearly visible in the AUM versus price charts. AUM changes are broadly attributable to inflow, reinvestment of payouts, and price changes, so a clean attribution of waning AUM to either variable is not perfect. But the rise in interest from April 2025 to August is still visible. This is helped by a direct impact of share price stability and its indirect impact on investor interest (high yields on a stable base). The same observations are true for the decline since August, accelerated since October (coincidentally, since my last coverage). Data by YCharts The drop in interest since October follows a similar trail as the price graph. So, that is certainly a factor, mechanically dragging the AUM. However, we can confidently assert that inflows have certainly slowed compared to the earlier regimes, where AUM was growing despite a flat price trajectory. Data by YCharts Yields, NAV Erosion and Reverse Split The reverse split has grabbed most of the attention in the past few months. Standalone, that is not a negative development in my view. A yield product trading at $100, say, drops to $1 due to heavy yields, may resort to reverse splits for operational reasons or optics. Even an income plan that actually works may do the same. The reverse split per se is not an acknowledgment of issues in a strategy. The core issue is therefore not the yield (and NAV erosion) as well. The core issue is whether reinvestments would have mattered - that is, total returns. If the drop to $1 was accompanied by, say, a payout of $200, reinvesting into a systematically growing total return machine would have been a no-brainer - agnostic of how many units I am forced to hold. I will evaluate the total return performance in a subsequent section. NAV erosion is an issue for investors not reinvesting payouts. This is because even in a systematically growing strategy, there is less left on the table on the way down (you take the payouts while the underlying is going down) and do not gain as much because of lower stakes on the rebound. As an example, say you invested $100 in MSTR. It travels down to $50. You have taken out $20 systematically as payouts during this fall, reducing the stakes further from $50 to $30. When MSTR rebounds back to $100, i.e., doubles, your investments also double, but only to $60. Adding the $20 already harvested, the net position reads $80, not $100. MSTY, of course, adds an option layer that could plug this $20 hole in the net outcome, but as we will see in the Performance section later (and have seen in my past analyses), the option layer's upside capping mechanism and limited drawdown benefits do not work out very well over full cycles. One way to address this issue of NAV erosion is to balance yields - particularly if investors intend to use MSTY as a long-term income plan rather than a tactical ploy in flat to pressured MSTR regimes. There, MSTY has not really made any major changes yet to moderate the yield levels. In fact, MSTY's yield levels have only become more aggressive since October. Dividend Yield - MSTY (Seeking Alpha) Portfolio Deep Dive I downloaded the latest intraday trades and current holdings reported on the MSTY website to understand the strategy's current positioning. The core long position is implemented using options (synthetic position) with positions across February 2026 and March 2026. These are rolled over near or before expiry to maintain the net long effect on MSTR. Portfolio Drilldown Options - MSTY (MSTY) Covered calls are written for the near month expiry, as expected, but spread across strikes ranging from $175 to $192.5. The call writing ladder formation ensures some upside capture compared to a simpler call writing at-the-money structure. While some of these strikes can be deemed at-the-money, significant call writing far out of the money shows upside capture is not as restricted as in theory. Another factor that supports upside capture is that the covered call layer accounts for ~70% of the net long position (February and March combined). This balances income positioning with upside retention. There is a call spread structure also seen, with long positions for the near month expiry for strikes further out - between $182.5 and $200. This layer ensures unlimited upside is captured beyond a point when MSTR rallies, which is great for reducing the upside cap drag. However, I could not see a balanced long exposure here. The call layer is marginally smaller than the short call layer (check the number of share equivalents in the figure above for context) - an attempt to optimize income while retaining upside capture potential. Since the methodology is clearly active, this layer's size could change depending on how management views MSTR in the near month. Since MSTR is down and consolidating now, we could be seeing a bigger upside capture layer now. We may see less long call convexity in another regime. While the holdings reveal more upside capture possibilities than a theoretical at-the-money covered call strategy (through partial option coverage, and a call spread structure), that also comes with lower income potential or drawdown mitigation possibilities. The funding required for buying the long call layer (in pursuit of upside capture) erodes the option premiums gained from call writing. The balance is so demanding (between income and upside capture), that the ask becomes very high of the active management - and getting the balance right in every market condition is indeed a tougher ask. This was the case in October when I last wrote - and structurally I do not see much difference today in the portfolio. There is no additional long put layer to cushion falls (for example) or material structural changes to address the inherent issues with such a methodology. This active management requirement shows up in the intraday log I downloaded for 16th January 2026. Assuming it is indicative of how the ETF typically operates, I saw around a 2-3% increase in core exposure in just one day. This could be adjusting to inflow changes, rolling over positions, or speculative positioning—but it shows the amount of activity required even in the core position daily. On the covered call credit spread layer, I saw over 180k contracts traded. This could also be due to various reasons like a change in outlook or new coverage for added net core exposure or even rollovers. The amount of activity and active calls involved looks very high to me - a tall ask while MSTY tries to manufacture yields every day. This is not necessarily a negative, but introduces more risk of errors in active calls and certainly inflates expenses (close to 1%). Importantly, despite all the activity, it does not create a compelling performance graph over the long term. Expected Performance Trajectory As I mentioned before in this analysis (and across older articles), total returns remain my biggest concern when it comes to MSTY. For investments made at inception, MSTY investors are still behind MSTR's total returns - this is now confirmed after MSTR's drawdown had shown more cyclical data across regimes. Data by YCharts The second aspect I wanted to show, now that we have more drawdown data that was missing before, is how MSTY's option layer does not generate meaningful alpha over the long term - something I have been talking about theoretically so far. In a regime spanning from early 2024 to today (just less than 2 years), MSTR has not gone anywhere on an end-to-end basis. MSTY does not meaningfully add any expected alpha from the option layer, nor does it reduce the volatility of the trajectory. Data by YCharts It is actually great that MSTY has not eroded systematically. It has actually captured upsides better (as seen from the portfolio setup analysis) than theory would have suggested. However, that has come at the cost of systematic income accumulation from the option layer over time. MSTY at best becomes a proxy for MSTR, following it closely. But introducing huge active management risks and expensive turnover and forcing a yield, investors in MSTR (aiming for systematic income from the underlying directly) can choose to set. The AUM pressures have ironically come in a period when MSTY has actually delivered on its promise of reducing drawdowns - it is down by ~32% when MSTR has crashed by ~39%. This is expected behavior, and waning investor behavior in a relatively good period for MSTY shows most investors were actually betting on MSTR rather than MSTY's relative advantages. Data by YCharts Retaining the Sell My recommendation for MSTY investors remains the same. MSTR-agnostic investors should stay away. Those who believe in MSTR's rebound or long-term strength should invest in MSTR and withdraw income (because that is what MSTY ends up doing anyway). Only for tactical investors, MSTY could make sense - it will cushion drawdowns, although in a limited capacity, and generate some income in flat markets. Looking at the AUM activity, MSTY was certainly not being looked at as a tactical tool - so for a vast majority of MSTY investors, it is a sell.