What Is the TSLY Income Strategy Fund?

YieldMax’s Tesla Option Income Strategy ETF (TSLY) offers traders an very intriguing high-risk, high-yield value proposition based around options on shares of Tesla (NASDAQ:TSLA).

While Tesla itself is one of the most popular stocks among retail investors and options trading in it is common, TSLY attempts to deliver high levels of income for shareholders without requiring them to manage options contracts themselves.

How precisely does investing in TSLY work, and is it a smart choice if you’re an income-oriented investor?

What Exactly Is TSLY?

TSLY is an income ETF that sells options on Tesla stock. The fund’s main priority is to generate immediate income for its shareholders, though it also seeks to gain over time from the appreciation of TSLA share prices.

With that said, it’s important to understand that TSLY doesn’t invest in Tesla directly, meaning that the link between Tesla’s share prices and the fund’s performance is an indirect one.

Despite deriving the vast majority of its income from Tesla options activity, TSLY keeps most of its holdings in US bonds. Treasury notes account for over 95% of the fund’s current holdings, allowing it to earn some yield from its cash. These holdings are also used to collateralize the fund’s options.

As an actively managed ETF, TSLY’s expense ratio is understandably higher than low-cost index funds. At just under 1%, however, it’s still lower than many actively-managed funds.

TSLY is one of several options income funds offered by YieldMax, many of them similarly specializing in options on individual stocks. Other companies that are the targets of YieldMax options income funds include NVIDIA, Microsoft, JPMorgan and Apple, to name just a few.

How Does TSLY Generate Income?

TSLY writes covered call options on shares of Tesla, then sells those options to traders hoping to profit from future price changes in TSLA stock.

As the writer of the options, TSLY collects a premium from those who buy its calls. These options, according to the fund’s prospectus, typically have expiration dates of one month or less.

This allows to TSLY to produce monthly income from premiums which it can then deliver to its shareholders.

What Kind of Yield Does TSLY Produce?

TSLY’s yield is interesting, as its real yield is poorly represented by the commonly used 30-day SEC yield metric.

This metric, currently at 4.2 in TSLY’s case, excludes options income, meaning that it fails to capture the majority of the fund’s actual distributions.

The distribution rate, a measure of yield assuming that the most recent payout was paid consistently over the next 12 months, however, is over 74%. This yield is extremely high, easily outpacing the vast majority of even high-risk, high-yield stocks.

Investors should, however, be aware that TSLY’s payouts are also much less predictable than those of most stocks. In the past 12 months, payouts have ranged from $0.64 to $1.21. This reflects the fact that options income is highly inconsistent, unlike dividends from stocks that are derived from more dependable cash flows.

Nevertheless, even the lowest of these payouts extrapolated out over a year would give TSLY a distribution rate of over 50%.

How Risky Is TSLY?

In addition to ups and downs in payouts, investors should also understand that TSLY comes with a fairly high degree of risk.

As a fund that writes options on a single stock, TSLY carries a number of crucial risks. To begin with, options writing can be an inherently risky strategy.

With no structural cap on potential losses, options writers can lose large amounts of money when stock prices move rapidly. TSLY’s upside is capped when Tesla shares move higher, but the fund can be stuck with large losses if shares of the auto major decline.

Adding to this is the fact that TSLY revolves around a single stock, meaning that the fund’s options aren’t diversified. This introduces another layer of risk to an already risky investment strategy.

Compounding this is the fact that TSLA shares are quite volatile in and of themselves. Tesla’s 5-year beta is 2.3, making it more than twice as volatile as the S&P 500 overall.

While volatility in Tesla’s case has historically been mostly upwards, the stock is vulnerable to large swings in both directions due to its high valuation and popularity among retail investors.

Is TSLY a Good Buy?

Though TSLY is geared almost entirely toward income-oriented investors, it’s worth noting that the fund’s returns have been negative when distributions aren’t counted. Cumulatively, TSLY has lost about 5.7% since its inception date.

Taking this into account, TSLY likely isn’t a good choice for investors seeking long-term growth from their portfolios. Between not offering any direct ownership of shares and losing value over time, TSLY likely has limited potential for the kind of growth investors would normally look for in a stock, index fund or growth ETF.

This largely leaves TSLY in the domain of income investors seeking immediate and significant cash flows from their portfolios.

Investors should also likely consider that TSLY’s history is quite brief and that future income could easily lag past performance. The fund went public in November of 2022, and Tesla returned over 100% in 2023.

Though the stock is down by about 7.9% YTD, TSLY hasn’t yet had to weather a significant and sustained downturn in TSLA’s share prices. Even with the relatively favorable conditions under which the fund has operated up to now, current monthly distributions are lower than they were in 2023.

Even with all of this said, however, it’s difficult to completely write off TSLY given the level of income it is currently producing for shareholders. Although the fund’s risks are extremely high, risk-tolerant traders may find its yields attractive enough to take a chance on.

For those who are comfortable with option risk and seeking income from their portfolios, TSLY may be worth taking a small position. Conservative and medium-risk investors seeking long-term returns, however, may find the fund to have too many potential downfalls to be worth investing in.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.