The Achilles’ Heel of ETFs Promising 100% Income Yields

One of the hottest products for retail investors the last couple of years is the single-stock option-income exchange-traded fund. While the basic idea is similar to the old and respectable covered-call writing strategy, the modern versions grabbing attention and dollars are supercharged, promising income yields of 100% or more.

The largest such fund is the Yieldmax TSLA Option Income ETF, or TSLY, which takes long and short positions in call and put options on Tesla Inc., or TSLA, shares. The fund is actively managed to have a generally long exposure to Tesla stock, to generate substantial income from net selling of options, but in return to forego some of the upside if the stock rises, while suffering increased losses if the stock goes down. While this can be a useful tool for short-term speculators, it shares with leveraged and inverse ETFs an Achilles’ heel for long-term investors.

The chart below shows the daily returns on TSLY versus the returns on TSLA since the fund’s inception. The blue dots are the actual returns, the curving line is my calculation of what a long-term investor should expect on average — the variation of the blue dots around the line should average out over long holding periods.

The Achilles' Heel of Option Income ETFs

This pattern might be appealing to an investor making a one-day bet. If TSLA doesn’t move, TSLY returns an average of 0.21%, which annualizes to 69%. If you think TSLA will go up a lot (more than 0.65%), you’re better off buying the stock. If you think TSLA will drop more than 0.29%, you’re better off avoiding both TSLA and TSLY. But in between, TSLY beats both TSLA and money markets.

The view for a long-term investor is entirely different.