Q: Hello, looking at UMAX, the price went from 16$ to 14$ in less than 2 years. Is it because the NAV is going down because of the dynamics of covered calls? Sould we expect a steady price erosion for the foreseeable future? It’s nice to have 13+% annual distribution but if we have a corresponding capital loss, I am not sure it makes sense. Can this ever be a long term hold? Thanks.
5i Research Answer:
A big part of the distribution is return of capital, and this can reduce net asset value and result in price decay (this is not always the case, but certainly happens with many ETFs). The part of the distribution that is ROC does lower the cost basis of the units for tax purposes, so it does shift income from income to capital gains. But some price erosion is possible with such high yields. A total return analysis is important here, with units down 6.10% over one year, but paying out 14.53%.