Most people don’t know what an ETF actually is.

That’s not a criticism. It’s by design. Wall Street wants you to think it’s complicated. But once you strip away the financial jargon, most ETFs are simple machines.

At their core, they’re just someone else’s portfolio, one you can buy a share of, for a small fee.

The Basics

If you buy one share of Apple, you own Apple.

If you buy one share of an ETF like SPY, what you really own is a sliver of 500 companies, bundled together. That’s all an ETF is: a pre-packaged basket of stocks.

Someone else does the shopping. You buy the cart.

For decades, this was revolutionary. Suddenly, regular investors could get diversified without thinking too hard.

But the core idea stayed the same: buy and hold stocks, charge a fee, call it a day.

Then came the derivatives.

Enter the Option Engine

Not all ETFs hold stocks anymore. Some, like those built by Defiance or YieldMax, take a different route.

Instead of holding shares, they hold cash, usually ultra-safe Treasury bonds. Then they use that cash to power a trading strategy:

Sell options on the stocks they don’t own. Collect premium. Repeat.

This is how high-yield income ETFs are made.

They’re not trying to grow. They’re trying to extract income from volatility, by renting out the right to buy or sell stocks at specific prices. Think of it like harvesting energy from market chaos.

It’s not investing. It’s engineering.

The Synthetic Core

These ETFs don’t actually want the stocks. Stocks are messy. They move too much. They require management. Instead, they use derivatives to simulate exposure.

The result is a synthetic machine:

  • Cash in treasuries for ballast
  • Options for income
  • No real stock ownership

It’s clean. It’s efficient. It works, until it doesn’t.

Because these aren’t index funds. They’re reactors.

Then They Added Leverage

YieldMax took the Defiance model and flipped the breaker. Why stop at 1x exposure when you can simulate 2x?

Their ETFs, like TSLY, ULTY, or NVDY, are designed to mirror, and amplify, the movement of a single stock. Not just track it. Weaponize it.

You don’t get the stock’s dividends. You don’t get voting rights. What you get is a machine that tries to extract twice as much monthly yield from the same price movement.

That’s not a portfolio. That’s a pressure vessel.

Now They’re Using Swaps

In June 2025, YieldMax added a new layer: swaps.

If options are contracts about the right to buy or sell, swaps are agreements to exchange outcomes. A swap says:

“If the stock goes up, you pay me. If it goes down, I’ll pay you.”

It’s exposure without ownership. A bet without the bet ticket. Used right, swaps let you simulate stock behavior without needing the stock, the options, or even the margin.

Why do this? Flexibility. Efficiency. And most of all: control.

Swaps are synthetic gears for a synthetic engine. The more parts they control, the more precise the yield extraction can become.

But precision cuts both ways.

Why This Matters

If you’re buying a YieldMax ETF, you’re not buying a company. You’re not even buying a stock fund. You’re buying into a synthetic income algorithm:

  • Cash in treasuries
  • Options on volatility
  • Leverage on top of that
  • Swaps now layered in

This is not for widows and orphans. This is for people who want monthly cashflow and know the machine burns itself down while doing it.

It’s not a bug. It’s the blueprint.

These instruments are designed to decay.
But while they do, they throw off heat.

OppenFolio was built to harness that heat, and contain it.

You can always reach me at [email protected] if you want to go deeper.

Disclaimer: This post is for informational purposes only and reflects personal opinions, not financial advice. OppenFolio is not an investment advisory service. See site disclaimer for full details.