Single Stock ETF Update

They did it! They really did it!

Back in July we took a quick look at a filing of new ETFs branded YieldMax which simplistically are single stock ETFs that track a stock combined with a covered call. A little more specifically they don't own the stock they create a synthetic long exposure by selling a put and buying a call (Google synthetics to learn more). That combo will go out for six months. The fund will sell call options every month for income like a covered call. The vast majority of the AUM will be in treasuries that go out 6 months to two years and now of course those treasuries will be a source of decent yield. 

The filing is for 10 funds and now two of them have launched including the YieldMax TSLA Option Income Fund (TSLY). Obviously it tracks Tesla or at least tries to, the literature goes out of it's way to drive home the idea that the YieldMax funds could look much different than the underlyings they track. 

So of course they need to disclaim that it might not look like TSLA but what should potential holders actually expect? Can we glean anything from how the 1.5x leveraged TSLA ETF in blue has done compared to the common in red?

 

The thing I say all the time about the levered products is that they certainly can deviate from the common or underlying and do so by a lot but more often than not they seem to track pretty closely over the longer term despite the daily objective. To have tracked exactly, TSLL would have to be down 57% versus the 54% drop it has actually had. Is 54% close enough? That's up to the end user. 

But what about these new funds that use options to replicate the long exposure? I don't know what the outcome will be but the use of options is trickier, especially for a stock that is particularly volatile. Things like delta (the amount the option moves in price relation to how much the common moves) can change quickly, that's referred to as gamma and the extent to which the time premium erodes (theta) can also be tricky, causing unexpected movements in the options. 

When the stock drops, the synthetic long should replicate the effect of being long the stock but should does not equal must, it could end up worse if they hold on no matter what through being assigned on the short put. 

There's no scenario where I want to take on the volatility of TSLA or a derivative TSLA ETF personally or for clients but there are one or two other stocks in the filing where if this concept works I would consider using other YieldMax funds.

I think what these might end up being, and this would be positive, are hybrid income products. For now the treasuries yield about 4%, less the 99 basis point fee and then maybe 300 basis points from selling call options. So maybe 600 basis points of total payout paired with equity volatility. I think there's room in a diversified portfolio for those attributes when available with the right underling equity.