TSLY: Unsuitable Investment Strategy, Subpar Performance

seekingalpha01-29

TSLY is a covered call Tesla ETF.Although the fund sports a massive 99.4% distribution yield, its share price and distributions have trended downwards since inception, and the fund has underperformed....

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Although said strategy captures some of Tesla's upside and results in massive distributions, it has many significant downsides. Specifically, the fund is exposed to excessive downside risk, will almost certainly see consistent capital losses and distribution cuts, has a sub-par performance track record, and seems very tax inefficient. In my opinion, these are incredibly significant negatives, and deal-breakers. As such, I would not invest in TSLY. TSLY - Quick Overview TSLY is synthetic long Tesla, through purchasing ATM calls and then selling an equivalent number of ATM puts with the same expiration date. This is functionally equivalent to being long Tesla / owning Tesla stock, with the same return profile. TSLY's synthetic long position does not require a significant capital investment. This allows the fund to invest in t-bills, with these encompassing almost 100% of the portfolio by weight. TSLY then sells another set of calls, generally 5% - 15% OTM, and generally with an expiration of 1 month or less. These options cap upside potential, at around 5% - 15% per month. These are incredibly rough figures, and strongly dependent on the specific time period analyzed. Although the cap seems quite high, Tesla is an incredibly volatile stock, and so said cap does sometimes result in significantly lower capital gains. As an example, during November 2023 Tesla was up 19.5%, but TSLY only rose 5.0%. TSLA's capital gains were much lower but in line with expectations. Data by YCharts Importantly, these options have no impact on downside potential. As an example, Tesla is down 29.9% this past month, while TSLY is down 29.6%. Losses were quite similar, with the small difference likely being due to volatility and similar issues. Data by YCharts In exchange for capping its upside, the fund receives significant options premiums. These are distributed to shareholders, with the fund sporting a massive 99.3% yield. Annualizing the fund's most recent monthly distribution nets me a 76.5% yield, materially lower, but still sky-high. So, TSLY's options limit its upside potential but massively boost its distribution yield. Doing so has many significant negatives. Let's have a look at these. TSLY - Negatives Excessive Downside Risk TSLY experiences more or less the same capital losses/reductions in share prices as Tesla does. These are sometimes massive, as the company is incredibly volatile. Specifically, Tesla is more than three times as volatile as the S&P 500, with more than twice the drawdowns. Data by YCharts In my opinion, TSLY's downside risk is excessive, and almost a deal-breaker by itself. Importantly, it is also an unnecessary risk, as there are many fantastic covered call ETFs in the market with much lower risk. The JPMorgan Equity Premium Income ETF (NYSEARCA: JEPI) is one such ETF, with less than one-third of TSLY's volatility. Data by YCharts The NEOS S&P 500 High Income ETF (BATS: SPYI) is another one, although with a shorter performance track record. Data by YCharts TSLY's excessive downside risk is a significant negative for the fund and its shareholders, and an important disadvantage relative to peers. Consistent Capital Losses and Distribution Cuts TSLY experiences effectively all of Tesla's losses, but only a portion of its gains. As Tesla is incredibly volatile, this should result in ever-decreasing share prices for TSLY, as has been the case since its inception. Data by YCharts As asset values plummeted so do distributions, with these down 44% since inception. There has been a lot of volatility, but the trend is very clearly downwards. Data by YCharts Although some covered call ETFs suffer from the issues above, the magnitudes tend to be much, much lower. JEPI, for instance, has actually seen some price gains since its inception. Dividends are down too, but the overall trend is unclear, and could simply be the result of timing/volatility. Data by YCharts SPYI's share price and dividends are both flat. Data by YChartsData by YCharts TSLY's consistent capital losses and distribution cuts are significant negatives, and important disadvantages relative to most of its peers. In my opinion, and considering the above, TSLY's distributions are so unsustainable and so much more than that of its peers, that distribution yields are not particularly informative metrics for the fund. JEPI's current 8.3% yield tells us something about the distributions and returns that investors can expect from the fund (around 8%), TSLY's 99.4% yield tells us little. Subpar Performance Track Record TSLY's overall performance track record seems sub-par, with the fund underperforming relative to both Tesla and the S&P 500 since inception. Data by YCharts Returns are almost always higher when Tesla outperforms, but rarely all that great. As an example, the fund has underperformed the S&P 500 since my previous coverage, even though Tesla itself has outperformed. TSLY saw less capital gains than Tesla itself when the stock was going up, but the same capital losses when it declined, leading to underperformance. Data by YCharts At the same time, TSLY has underperformed both JEPI and SPYI since inception, and with much greater volatility. Data by YCharts TSLY's sub-par performance track record is a significant negative and, in my opinion, indicative of significant issues with the fund's underlying strategy. I don't think that consistently selling calls on individual tickers without any regard for their prices, equity volatility, etc., is a wise decision. There are better, more sustainable ways to implement similar strategies, but what TSLY is doing does not seem to work. Tax Considerations As a final point, TSLY's distributions seem to mostly consist of net investment income, which is taxable. TSLY Importantly, the fund's distributions are massive, so investors could conceivably be facing double-digit tax rates on their positions. The fund's consistent capital losses worsen the situation. Imagine receiving 60% in distributions, seeing a 50% capital loss, and then paying taxes on the 60%. These would more or less wipe out all your profits. These are, of course, tentative figures, and much will depend on the specific circumstances of each individual investor or portfolio. At the same time, the figures above are estimates, and subject to change. Full disclosure, some, perhaps most, covered call ETFs are less tax-efficient than buying simple equity ETFs. TSLY's situation seems much worse than average, however, to the point that it merits special mentioning. Conclusion  TSLY offers investors a massive 99.4% dividend yield, but has excessive downside risk, consistent capital losses and distribution cuts, a sub-par performance track record, and seems very tax inefficient. In my opinion, these are incredibly significant negatives, and deal-breakers. As such, I would not invest in TSLY.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2407851277"}