Leveraged Derivative Income Funds? Really?

GraniteShares launched a couple of more 2x put selling funds, one that tracks the S&P 500 with symbol YSPY and one that tracks QQQ with symbol TQQY. The product suite is called YieldBoost and the Tesla Yield Boost has been trading for a little while with symbol TSYY.

Specifically, TSYY sells put spreads on a 2x Tesla ETF and it had been holding up better than the underlying common until this latest downturn in TSLA stock. TSLL is 2x Tesla. The drop in TSYY started to track closer to the common when the price of TSLL went below the strike of the short leg of TSYY's put spread. If you don't know what any of that means, you should learn before even considering buying a fund like this and even then, it's questionable. 

YSPY is similar but not identical to TSYY. The fund objective talks about 200% of SPY but its put spread is written on SPXL which is the Direxion 3x fund. I asked the firm about it and was told that the put spread is far enough out of the money that it has the effect of 2x. It looks like SPXL closed on Wednesday at $171.63 and the short leg of the spread shows on the YSPY page struck at $171.5. If those numbers are correct then it's not really out of the money by all that much. 

The Defiance S&P 500 Enhanced Option & 0dte Income ETF (WDTE) is in the same neighborhood as YPSY. It sells 0dte put options obviously and has a very high yield as I expect YSPY to have. I don't know how similar YSPY will be to a leveraged version of WDTE but if it is similar, the following might give a picture of what to expect. 

With 300 WDTE I tried to approximate what selling puts on a 3x fund might look like but that may not turn out to be valid. The bigger takeaway though is probably the difference between the reinvested numbers and not reinvesting. Obviously 3x WDTE is not accurate for how the fund really does and GraniteShares does not expect YSPY to erode 90% in a year and half but in the wrong type of market the erosion could be painful.

Below is a backtest for someone that might need to take a lot of income out via an approach we've looked at before in previous posts that takes the distributions out as income. 

Putting 9% into WDTE with leverage is an attempt to replicate what YSPY might be like but again maybe that turns out to be wrong. 

First, the positives. With both portfolios, there's only 3% of the portfolio at risk of complete immolation. Portfolio 1, the leveraged one, yielded 7.5% in 2024 and Portfolio 2 yielded 5.6%. Putting 5% into unleveraged WDTE would have had a portfolio yield of 6.3%. 

The way I built these, 57% is in plain vanilla S&P 500. The S&P 500 can obviously go down a lot but there isn't a reasonable probability that a fund tracking the index will malfunction in such a way that it will fail. If the S&P 500 goes down 40% and YSPY were to go down 95%, would the portfolio be that much worse off? I'd say no. I didn't use T-bills for the fixed income but you could. 

This is of course a variation of a barbell strategy squeezing a lot of the yield out of a smaller portion of the portfolio. With the leveraged version, almost half the yield comes from WDTE or potentially YSPY if it pans out that way. 

If the S&P 500 continues to generally trend higher the way it usually has, then the erosion of YSPY's share price might not be that bad and certainly, in the average year the growth rate of the 57% in the S&P 500 would outpace the erosion. YSPY will probably have some erosion but the entire portfolio would not automatically be at risk of erosion. To maintain this, some S&P 500 would need to be sold off periodically to buy more YSPY. 

The income paid out by any derivative income fund should be expected to be lumpy. A common poke at derivative income funds is that the "dividends" are often characterized as returning invested capital. If a fund can tread water and pay out a high distribution rate that is not taxable, I'm not sure why that is a negative. From that hoped for frame work, now of course some amount of erosion should be expected. GraniteShares doesn't think there will be too much erosion but I am skeptical of that. If the YSPY erosion was 40% per year as it maintained a large even if lumpy payout, then the required rebalance out of the S&P 500 fund would equate 120 basis points and annualized out, the S&P 500 has of course grown at a much higher rate.

Clearly there are a lot of assumptions here about how YSPY might work. My assumptions could be pretty close, only half right or maybe oh my God how could anyone be so wrong. But that's the point, to be willing to pay attention to a lot of these and to start sifting. The blogging process is great for taking first looks, like we're doing today, and then following up to learn whether some off the beaten path fund/strategy might work. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.