What is TSLY?
In recent years, covered call ETFs like QYLD, XYLD, DIVO, and JEPI have gained popularity among income investors for their ability to generate solid income by writing covered calls on broad market indices.
However, a new type of covered call ETFs is emerging, focusing on single companies, such as the YieldMax ETFs. Compared to the traditional covered call ETFs, the YieldMax ETFs uses synthetic call writing strategy, which means that the ETFs generate income by covered call without holding the stocks by leveraging synthetic options strategy.
Among them, TSLY (YieldMax TSLA Option Income Strategy ETF) bases its strategy solely on Tesla.
Other YieldMax funds such as CONY (YieldMax COIN Option Income Strategy ETF) and NVDY (YieldMax NVDA Option Income Strategy ETF) have also attracted investors with their assets under management significantly increasing, due to their high yield.
The most impressive part of TSLY is that it offers a very high dividend yield of more than 94%, compared to 1.6% sector yield, according to TripRank.com data. On the YieldMax website, it shows a distribution rate of 93%, with 30-day SEC Yield of 4.26%.
Compared to other ETFs, the TSLY has been an outliers with its outstanding yield rate, according to marketchameleon.com data. Based on the same platform, TSLY’s yield rate reached mind-blowing 110.9% on April 22, 2024.
Its total AUM (assets under management) has increased sharply in 2023, reaching 890 million, but remained stable in 2024, according to Ycharts.com.
How TSLY work?
For how synthetic options works, please refer to the post about YieldMax ETFs we published before.
Put it simply, the main strategy involves selling call options on the underlying stocks held by the ETF, generating premium income. Meanwhile, YieldMax ETFs also use synthetic options strategies to replicate the performance of underlying stocks without actually owning them.
Therefore, TSLY does not realy hold any Tesla shares but using synthetic options strategy to mimic the holdings.
While covered call options limit the upside potential beyond the strike price, they effectively generate income and provide a buffer against moderate declines. This strategy can bring stable income in fluctuating markets, as long as prices remain stable or rise slightly.
The strategy is suitable for investors seeking stable monthly income from option premiums and willing to sell their shares at a specific price.
However, both the covered call strategy and the synthetic options strategy would have some side effects in the long-term investment of the YieldMax ETFs, including TSLY.
Treasuary Notes/Bonds in Holdings
On the other side, from the prospectus and the YieldMax website, you will find that TSLY holds a significant portion of U.S. Treasury Notes / Bonds as part of its overall strategy.
These notes or bonds work as collateral for its synthetic covered calls, to secure the obligactions created by selling options (particularly put options). U.S. Treasury Notes / Bonds are considered highly secure and liquid, making them ideal collateral, with varying maturities and yields.
If TSLY needs to quickly raise cash, it can sell its Treasury holdings without significantly affecting the fund’s portfolio, providing liquidity and flexibility to adjust the fund’s position as market conditions change.
The various Treasury securities held by TSLY have coupon rates ranging from 0.75% to 3.875%, contributing to the overall income of the fund.
From Stockanalysis.com
Is TSLY safe?
Pro: Treasuary Notes/Bonds in Holdings
On the other side, from the prospectus and the YieldMax website, you will find that TSLY holds a significant portion of U.S. Treasury Notes / Bonds as part of its overall strategy.
These notes or bonds work as collateral for its synthetic covered calls, to secure the obligactions created by selling options (particularly put options). U.S. Treasury Notes / Bonds are considered highly secure and liquid, making them ideal collateral, with varying maturities and yields.
If TSLY needs to quickly raise cash, it can sell its Treasury holdings without significantly affecting the fund’s portfolio, providing liquidity and flexibility to adjust the fund’s position as market conditions change.
The various Treasury securities held by TSLY have coupon rates ranging from 0.75% to 3.875%, contributing to the overall income of the fund.
From Stockanalysis.com
Con: Avoid yield trap
Yield trap is something we can should be cautious when investors are only attracted by the mind-blowing high yield. For example, some REITs stocks like DDR (DDR Corp) would have very good dividend yield rates, but if their stock price keep dropping, the final performance of the stocks could be compromised much, according to an article shared on Motley Fool website.
TSLY could face similar situation.
Despite the high yield, TSLY has shown poor performance with a 13.85% drawdown since it inception in Novmeber 2022, while the performance of Tesla stock (TSLA) performs better with a positive 4.6% in the same period.
The total return, which includes dividends, still underperforms compared to other covered call ETFs.
One of the biggest risks is the opportunity cost of buying TSLY compared owning the underlying stock Tesla.
TSLY has faced substantial losses, with a 21.67% decline year-to-date in 2024 and nearly 24.73% drop over the last year. Investors would have lost money even with the monthly income distributions. Even reinvesting dividends would have resulted in further losses
Overall, compare to Tesla’s performance, TSLA has performed worse.
Risk: High Volatility and High Expense
Additionally, TSLY’s high volatility and higher expense ratio (about 1%) make it less attractive, compared to other covered call ETFs with longer terms.
While TSLY bases its strategy on a single company rather than a broad market index, the fund’s volatility – and consequently its downside risk – is likely to be significantly higher compared to others like JEPI, DIVO, and the YLDs. The charting also shows that TSLY performs much worse than other covered call ETFs since inception (even with dividends reinvested), according to totalrealreturns.com.
This is particularly evident given Tesla’s inherent volatility as a stock. When we compare TSLY’s share price returns to those of other covered call ETFs, it becomes clear as mentioned above that TSLY is dramatically underperforming since its inception.
Until now, TSLY still has a drawdown of 32% as shown below.
However, from the perspective of asset allocation, it would be an option to arrange some proportion in your portfolio.
Risk: Decreasing Dividends
Besides, the fund’s dividend has also shown a decreasing trend in the last 2 years, from $1 per share to 44 cents per share, until it picked up in the last two months, according to marketchameleon.com. Its dividend range has been narrowed down significantly.
Last, TSLA’s sustainability is questionable and it recently underwent a reverse stock split to boost its share price. This move aims to meet stock exchange requirements and maintain assets under management, benefiting fund managers more than shareholders.
Con: NAV erosion
Though attracting much attention in the market, this high yield might be a potential yield trap, noted by some bloggers and Youtubers.
Like other YieldMax ETFs, YSLY uses synthetic covered calls strategy, which involve buying call options and selling put options on Tesla without actually owning Tesla shares. This strategy leads to high income but also involves returning a portion of the original investment, which can reduce the fund’s net asset value (NAV) over time.
Let’s use an simplified example to explain how the NAV of a fund like TSLY can be reduced due to the strategy of returning a portion of the original investment .
Initial setup of a fund:
Initial investment: $100,000
Number of shares: 10,000 shares
Initial NAV: $10.00 per share
If the fund generates $10,000 in income every month from its options strategy. However, to maintain a high distribution yield, the fund distributes, for example, $15,000 to its investors each month. The difference of $5,000 is not actual income but a return of capital (a portion of the original investment).
For the first month:
Income generated: $10,000
Distribution to investors: $15,000
Return of capital: $15,000 – $10,000 = $5,000
Total assets after income: $100,000 + $10,000 = $110,000
Total assets after distribution: $110,000 – $15,000 = $95,000
New NAV = $95,000 / 10,000 shares = $9.50 per share.
There are similar patterns in the following months.
Over time, because the fund is distributing more money thant it earns form its investment strategy (due to the return of capital), the fund’s NAV decreases. The decline in NAV reflects the erosion of the original investment, as each month a portion of the principal is returned to investors instead of being reinvested or maintained within the fund.
As a result, while investors receive a high yield, the long-term value of their shares in the fund decreases, potentially reducing their overall investment returns if the NAV continues to decline.
As you can see, the NAV of TSLY is decreasing along the months.
Risk: Short History
Like all other YieldMax ETFs, TSLY has a relatively short period since its inception, more data still need to tested in the coming years. It might be an option in your investment portfolio to harvest short-term income, but it would require much consideration for longer term investment.
Conclusion: Why TSLY has a high yield but much lower returns
Many people would ask why TSLY has a high yield but much lower returns. There are several factors we need to consider.
Due to Tesla’s stock price volatility and the synthetic nature of TSLY’s covered calls, it has experienced more than 30% drawdown since inception.
For similar reason of covered call strategy, TSLY’s gains are capped because it sells call options. These options oblige TSLY to sell Tesla shares at a predetermined strike price, limited the potential for capital appreciation for underlying stock Tesla.
Again, as mentioned, a portion of TSLY’s high yield is not pure income but include a return of capital. It means that part of the dividend payout includes a portion of the investor’s initial investment, reducing the NAV of the fund over time.
Besides, TSLY’s annual expense ratio is 1%, which is really high compared to other covered call ETFs. With a $10,000 investment and accounting for a 5% annual return, investors would pay $101 in the first year and over $300 by the end of the third year in expenses.
Note:
ETF: Price vs NAV
Before we go ahead with more about this single stock ETF with synthetic option strategy, we need to understand more about the difference between price and Net Asset Value (NAV) .
Price and NAV are two different metrics used to describe the value and market performance of an ETF.
The market price of an ETF is the trading price on a stock exchange. This is also at which investors buy and sell the ETF in the open market.
The market price is influenced by the supply and demand for the ETF. If the demand is high, the price may rise; if supply exceeds demand, the price may fall.
The market price can be higher or lower than the NAV, when the market price is higher than the NAV, the ETF is said to be trading at a premium; otherwise, the ETF is trading at a discount.
NAV, meaning the true value of the assets held by the ETF, is calculated by subtracting the fund’s liabilities from its total assets and then dividing by the number of outstanding shares. NAV is typically calculated once per day and reflects the intrinsic value of the ETF’s holdings.
TSLY’s liabilities include management fees, custodial fees, audit and legal fees, interest on leverage, payable dividends, unsettled transaction amounts, and other miscellaneous expenses, all of which impact the fund’s NAV and overall financial health.
In a comparison, both the market price and the NAV of TSLY are decreasing.
Charts from TradeingView.com
Price return vs Total return
When evaluating TSLY’s performance (or that of other dividend-based ETFs), it’s important to understand that simply looking at the share price return doesn’t provide a complete picture. If you only look at TSLY’s share price, you might see a decrease or lack of growth and assume the fund is underperforming.
However, when you account for the dividends paid out, the total return might be more favorable, although in TSLY’s case, even with dividends included, it has underperformed compared to other ETFs due to the significant drawdowns and the highly volatile nature of its underlying asset, Tesla.
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