TSLY: 50% Yield On Tesla

Looking for some high yield income from electric car maker Tesla (TSLA)?

A part of the Magnificent Seven stocks, TSLA is the only one of the group which isn’t up so far in 2024. YieldMax has introduced several ETFs which are tied to members of the Magnificent Seven. It launched the YieldMax TSLA Option Income Strategy ETF (NYSEARCA:TSLY) in November 2022.

Fund Profile:

As we noted in our recent article on another YieldMax ETF, the YieldMax AMZN Option Income Strategy ETF (AMZY), the strategies used for these ETFs are similar, if not identical in some cases.

The YieldMax TSLA Option Income Strategy ETF is an actively managed fund that seeks to generate monthly income by selling/writing call options on TSLA. The Fund’s primary investment objective is to seek current income. The Fund’s secondary investment objective is to seek exposure to the share price of the common stock of Tesla, Inc., subject to a limit on potential investment gains.

TSLY pursues a strategy that aims to harvest compelling yields, while retaining capped participation in the price gains of TSLA. TSLY doesn’t actually own shares in TSLA, but instead, it uses a synthetic covered call strategy – it buys call options on TSLA, and also sells TSLA call options at a higher strike price.

It also sells TSLA put options, in order to create income, and to help defray the cost of buying call options. These short put positions create a long exposure to downside price movement.

The Fund not only seeks to generate income from its options investments, but also aims to derive gains when the value of TSLA increases. The short call positions create a limit on the potential price gains from TSLA. The Fund holds short-term U.S. Treasury securities as collateral in connection with the Fund’s synthetic covered call strategy, which also creates income.

The Fund’s strategy will cap its potential gains if TSLA shares increase in value. The Fund’s strategy is subject to all potential losses if TSLA shares decrease in value, which may not be offset by income received by the Fund. The Fund may not be suitable for all investors. Shareholders of the Fund are not entitled to any dividends paid by TSLA.

The Fund does not invest directly in TSLA. The fund has a gross expense ratio of 0.99%. (TSLY site)

TSLY’s long call option and short put option positions run from 1 to 6-month terms, while its short call options expire in 1 month or less. Its Treasury positions mature in 6 to 24 months:

Dividends:

TSLY pays variable monthly distributions, which are impacted by the amount of net option premiums it receives from selling TSLA options. These monthly payouts have ranged from ~$0.64 to $2.13/share since its November 2022 inception.

The most recent payout was $.6448, implying a forward yield of ~50%, with a trailing yield of ~48%. The TSLY site lists the yield as 49.66%.

Risks:

As part of the Fund’s investment objective, the Fund seeks to provide current monthly income. There is no assurance that the Fund will make a distribution in any given month. If the Fund does make distributions, the amounts of such distributions will likely vary greatly from one distribution to the next. Additionally, the monthly distributions, if any, may consist of returns of capital, which would decrease the Fund’s NAV and trading price over time. The TSLY prospectus summary lists the various risks associated with the fund, on pages 5-10.

Holdings:

96.61% of TSLY’s holdings are in US Notes/Bonds, ranging in maturity from 11/15/24 to 1/15/26. The other long positions are TSLA 7/19/24 $180 and $175 call options. It also holds short positions in TSLA 7/19/24 $180.01 put options, and TSLA 6/21/24 $185.00 call options:

Tesla Earnings:

TSLA’s Net Income was down 55% in Q1’24, while EBITDA fell 35%, to $2.42B, mainly due to lower sales, and higher R&D costs.

Trailing Operating and Free Cash Flow were also down in Q1’24:

Q1’24 was TSLA’s lowest quarter for vehicle deliveries since Q3’22:

TSLA’s highest market share region is the US & Canada, where it has an ~4% share, vs. ~3% in Europe, and over 2% in China:

Tesla Peers:

Tesla has the largest market cap in the Auto industry, at $576B, over 2X that of Toyota. The other top 10 caps are much lower, led by Ferrari, at $75B, down to VinFast, at $9.97B.

There’s quite a spread on P/E valuations – TSLA’s 46X is 2nd only to Ferrari’s 53X. Stellantis, which owns Chrysler, has the lowest P/E, at 3.19X.

TSLA’s P/Sales of 6X, and P/Book of 9X are also 2nd highest to Ferrari.

TSLA has the highest forward P/E, at ~55X, with Ferrari 2nd, at 45X, and Stellantis at 3.59X.

Performance:

It hasn’t been a good year for TSLA, TSLY, or the auto industry so far in 2024, or over the past year. The auto industry is down 30%, while TSLA is down 27%, and TSLY is down 30% so far in 2024.

Looking back over the past year, we see that the auto industry’s total return is -40%, and TSLA’s is -34%. However, TSLA’s total 1-year return is -7.67%, due to its very high 48% distribution yield.

This illustrates a key factor found in many of the YieldMax ETF’s – they may suffer big declines in price, which are then mitigated somewhat by their very high distribution yields.

In TSLY’s case, it lost 56% over the past year on a price basis, but paid out 48.3%, thereby whittling down the total return loss to -7.67%.

Since its November 2022 inception, TSLY has generated a -4.19% total return, comprised of -$24.68 in price gains, and $23.00 in distributions, as of 6/20/24. That underperforms TSLA, which had a 4% total return during this period.

Initial TSLY investors have recouped ~57% of their $40.12 initial investment thus far, in a ~19-month period.

So far in 2024, TSLY’s total return is ~-21%, vs. -27% for TSLA. 12/31/23 TSLY investors have recouped 15.66% of their $24.24 investment thus far. TSLY did a 1-for-2 reverse split in February 2024.

Analysts’ Price Targets:

Wall Street analysts have a very large spread in their target prices for TSLA, ranging from $85.00 to $310.00. At $180.60, TSLA is about even with the $181.16 average price target, and ~72% below the $310.00 highest price target. TSLA is ~39% off of its 52-week high of $299.29, and 30.5% above its 52-week low of $138.80.

Parting Thoughts:

While TSLY offers a very high distribution yield, its large, one stock concentration in TSLA also poses high risk in TSLA down cycles for investors, as shown in its total return from inception and its 2024 YTD return. We’re holding off for now.