Generated Income with Substantial Risk from Tesla Leverage
GraniteShares YieldBOOST TSLA ETF: High Yield, High Risk
The GraniteShares YieldBOOST TSLA ETF (TSYY) is a new high-yield synthetic option ETF that offers indirect exposure to Tesla (TSLA) and focuses on income generation through an option writing strategy. Since its launch in December 2024, TSYY has become a popular choice for investors seeking high returns, but it comes with significant risks.
Initially, TSYY paid out distributions on a monthly basis, but it shifted to a weekly basis in June. This frequent payout structure has attracted many investors, but it also raises concerns about the long-term sustainability of the ETF.
One of the key risks associated with TSYY is its synthetic option strategy. The fund does not hold actual Tesla shares but writes put options synthetically, which means it is exposed to price movements disconnected from Tesla's daily stock changes. This synthetic nature can increase volatility and risk, as the fund is effectively writing options on an asset it doesn’t own, increasing the potential for losses if Tesla’s stock moves unfavorably.
Another risk is the fund's leveraged exposure. TSYY uses leverage, which magnifies losses as well as gains. Combined with the synthetic strategy, this leads to a high-risk profile. The fund's share price has declined significantly, about 63.7% since inception, signaling considerable downside risk from the leveraged nature of the fund.
TSYY also carries the risk of unsustainable high yields. The fund has a very high annual distribution rate of about 140%, which is considered unsustainable. This high payout rate contributes to the continuous decline in share price because capital is paid out faster than it can be generated.
The upside potential is capped while shareholders remain fully exposed to downside price movements in Tesla stock. This means the fund cannot recover well from market downturns, leading to potentially larger losses than traditional equity holdings.
Tesla’s stock price is known for high volatility, and given the fund’s close linkage to Tesla stock performance, the inherent volatility further increases investment risk.
Despite these risks, TSYY's strategy aims to generate very high income. An investor with $10,000 invested in TSYY could potentially generate ~$14,000 in annual dividend income. However, it's important to note that not all distributions from TSYY may be return of capital, and there is still a risk that distributions may have tax consequences that investors may need to account for.
Investors should be aware that TSYY is only suitable for those with high risk tolerances who understand these complexities. The latest Section 19 (a) notice indicates that 100% of the distribution was funded by return of capital, which isn't taxed as income and reduces an investor's cost basis, allowing taxes to be deferred until the time of sale.
GraniteShares also offers other YieldBOOST funds, including NVYY, XBTY, YSPY, TQQY, and COYY, which were launched recently, and their performance metrics are skewed due to their short operating histories.
In conclusion, while TSYY offers a high-yield income opportunity, its strategy amplifies the risk profile of the fund. The share price can be severely disconnected from the daily price change of Tesla, making it a high-risk investment. Prospective investors should carefully consider their risk tolerance and investment objectives before deciding to invest in TSYY.
[1] GraniteShares. (2024). Investor Alert: GraniteShares YieldBOOST TSLA ETF (TSYY). Retrieved from www.graniteshares.com/tsyy-alert
[2] Financial Advisor Magazine. (2024). Synthetic Option Strategies: Risks and Rewards. Retrieved from www.financialadvisormagazine.com/strategies/synthetic-option-strategies
- To maximize returns, some investors are now considering technology-focused investments like the GraniteShares YieldBOOST TSLA ETF, despite its high risks, given its focus on finance and investing.
- The synthetic option strategy employed by the GraniteShares YieldBOOST TSLA ETF, which relies on technology for its operations, introduces additional volatility and risks, making it a questionable choice for risk-averse investors.
