Yield Max TSLA Option Income Strategy ETF: One Of The Worst Constructed Covered Call Funds #NewsETFs

Choice is generally good for investors. The more options people have, the easier the time individuals will usually have finding what investments fit their financial objectives. Still, when certain types of capital allocation become more common, oftentimes there will be types of investments that take advantage of trends and offer choices that don’t make sense for many investors.

Covered call funds have increasingly become one of the more well-known investments for individuals seeking inflation-adjusted income. With prices still high and the market near record highs, finding companies that pay substantive and consistent dividends has become much more difficult. One covered call fund is the Yield Max Tesla Option Income Strategy ETF (NYSEARCA:TSLY). This investment uses synthetic long strategies to take a position in Tesla. The fund buys and sells call options in addition to shorting put options in order to generate income in order to make monthly payouts. TSLY also invests in low-risk-yielding investments such as Treasury bonds.

Since TSLY’s inception in November 2022, the fund has offered investors total returns of negative 7.93%, while Tesla (TSLA) has offered investors total returns 9.92%. The S&P 500 (SPY) has offered investors total returns of 38.70% since late 2022.

Today, I am initiating my coverage of TSLY with a sell rating. This fund is poorly constructed. Tesla is one of the most volatile stocks in the market with a five-month beta of 2.31, and this ETF both sells puts, and, uses a synthetic long strategy that involves selling off most of the upside potential in the underlying call option position. TSLY doesn’t offer income or growth investors a good risk-reward profile, and the fund will also likely see a significant net asset value decline over the long-term as well.

The Yield Max Tesla Option Income Strategy ET has an expense ratio of 1.01%, and assets under management of $668.89 million. The 30-day SEC yield which includes net investment income is 4.26%. The fund’s inception date is November 11, 2022.

Even though TSLY has paid out significant income since going to market in November 2022, this ETF has still offered investors negative total returns because of how volatile Tesla is. TSLY purchases at-the-money call options and then sells call options up to 15 percent out of the money. The term of these options is 1 to 6 months.

This ETF also shorts put options, so investors have capped upside but unlimited downside, which means that with a stock as volatile as Tesla, there will inevitably continue to be a significant net asset value decline over the long-term since the sell-off will likely often be as severe and the run-ups in the long positions.

The net asset value of the TSLY has declined by nearly 66 percent since the fund’s inception.

The volatility in this fund’s strategy and the premiums in the options this ETF is selling also makes the monthly income payouts very unpredictable as well.

TSLY’s monthly payouts have ranged widely from $.44 a share in the middle of 2023, to over a dollar a share in some months, such as July 2024. While increased volatility generally helps the fund’s monthly payouts, excessive moves down create risks for investors that outweigh the benefits, since upside benefits are capped while the downside potential is not. This is the main reason TSLY’s overall total returns are negative is the fund’s options strategy does not generally work with a stock that has a beta as high as Tesla does, at 2.31.

The most successful covered call funds such as JEPI and QQQI focus options strategies on indexes that can experience elevated levels of volatility, but not the kinds of excessive volatility levels seen in investments such as Tesla. The best-run covered call funds also focus on selling out-of-the-money calls rather than at-the-money calls to avoid a significant decline in NAV. The broader indexes tend to be much less volatile than equities such as Tesla, but these indexes can still experience elevated levels of volatility that enable investors to frequently get substantive but also more consistent payouts. While TSLY may appeal to some higher-risk traders willing to risk significant loss to principal, most dividend and income investors can find more balanced and appealing financial options.