The TSLY ETF has a 57% yield but is extremely risky: avoid

Active ETFs are doing well this year as investors look for yields in a high-interest rate environment rise. JPMorgan Equity Premium Income ETF (JEPI) has become one of the largest active funds with over $29 billion in assets. Its close siblings like JEPQ and JPIA have also seen huge traction.

Another ETF seeing strong demand and inflows is the YieldMax TSLA Option Income Strategy ETF (TSLY). The fund, which was created by YieldMax, has gone from a tiny ETF in January to have over $747 million in assets. And as shown below, the fund has had inflows in each month of this year. In all, the fund has over $925 million in inflows this year.

It is clear why the TSLY ETF has done well. Investors are attracted to the fund by its advertised yield. According to its website, TSLY has a distribution rate of 57.07% and a 30-day SEC yield of 6.03%. 

The distribution rate is defined as the annual yield that an investor would receive if the most recently declared distribution remained the same going forward. Therefore, since this does not happen it is unlikely that this yield is representative of what a person will earn.

Indeed, despite the high yield, data shows that people who invested in the fund when it was started have lost money. $10,000 invested in it on November 25th last year would be worth $9,071 today. 

For starters, TSLY is created using a relatively complicated financial engineering process. For one, most of its funds are in short-term US government bonds. A small portion of the fund is in cash while another substantial amount is in TSLA options.

As part of the financial engineering, TSLY ETF uses a synthetic covered call strategy. In a normal covered call approach, a fund would sell an option of a security it owns. In a synthetic call strategy, the company does not own the real asset. Instead, it creates a synthetic asset that mimics the real asset.

Therefore, I would recommend that investors, especially inexperienced ones to stay away from TSLY despite its high yield. For one, as demonstrated above, the fund’s returns are not all that good. Since its inception, the fund has shed about 4% while Tesla shares have jumped by over 10%. 

TSLY vs TSLA total returns

Second, investors should always allocate funds in assets they understand. Unfortunately, not many regular investors have a clear understanding about how TSLY and other covered calls work.

Finally, TSLY is quite an expensive ETF to own. It has an expense ratio of 0.99%, which is a sizable amount. In contrast, JEPI and JEPQ have an expense ratio of 0.35% while Invesco NASDAQ 100 ETF (QQQM) has a ratio of just 0.15%.

When investing in ETFs, I prefer allocating funds in SWANs (Sleep Well At Night). This is why I am a big advocate of popular funds like SPY, QQQ, and MOAT. It also explains why I recommend caution when recommending risky funds like TSLY and APLY.