The TSLY ETF Is an Income Monster

Many ETFs have come onto the market recently that use various options strategies to boost income. For example, some ETFs use covered call strategies to produce yields of 10% or more for investors from relatively low-paying portfolios of stocks.

YieldMax ETFs take this idea to the next level, using aggressive strategies to, as the name suggests, maximize yield. It's not uncommon for YieldMax ETFs to have dividend yields of 30%, 40%, or much higher in some cases.

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One extreme example is the YieldMax Tesla Option Income Strategy ETF (NYSEMKT: TSLY), which uses call option strategies on Tesla (NASDAQ: TSLA) stock to produce a high level of monthly income. In fact, based on the past 12 months of dividends, the ETF has a dividend yield of about 127%.

Of course, if something sounds too good to be true, that's usually the case. If there was an ETF that produced a sustainable three-digit yield and was likely to do so for the foreseeable future, we'd all be scrambling to buy shares. But in this case, there are quite a few caveats and important things to know before you consider investing.

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How the TSLY ETF works

It might surprise you to learn that the majority of the YieldMax Tesla Option Income Strategy ETF's assets are in U.S. Treasuries. It uses these as collateral to buy and sell options on the stock, which are typically near the current share price. For example, the largest non-Treasury position in the portfolio is July 2025 call options with a $340 strike price. Some of the positions are long, some are short (meaning the ETF sold options), and there are some put options in the portfolio as well.

The general goal with the options positions is to create the highest stream of income relative to the risk level as possible.

Risk factors to consider

There are two big risk factors to consider. First, and less significant, is the inconsistency of the monthly dividend payments you'll get. Over the past 12 months, the distributions from this ETF have been as high as $1.29 or as low as $0.40.

The bigger issue is that the stock price itself has a downward bias over time. In short, if the price of Tesla stock goes up, the ETF's options strategies severely limit the upside potential. On the other hand, if the stock falls, it can result in large losses. In fact, since the YieldMax Tesla Option Income Strategy ETF was formed in late 2022, Tesla stock has risen by 92%. Shares of this ETF have fallen by 78%, and there's even been a reverse split along the way.

Of course, even with a modestly declining share price, an ETF like this can still be a winner. In other words, if the ETF declines by say, 30%, but pays a 100%-plus yield, it's still a great investment. But that hasn't been the case. In fact, including dividends, this ETF has generated a 26% total return for investors since its 2022 inception. That's 52 percentage points worse than if you had simply bought Tesla stock and held on to it.

Is the TSLY ETF right for you?

In a nutshell, YieldMax ETFs produce the best total returns compared with simply buying the underlying stock in times when the stock is mostly flat for an extended period, without any massive price swings. And if you look at virtually any chart of Tesla's historic stock performance, you'll see that doesn't really describe its typical price action.

The bottom line is that if you think Tesla stock is going to be stuck in a narrow price range for a while, the YieldMax Tesla Option Income Strategy ETF could be a good way to play it. Just be aware that this and other YieldMax ETFs aren't magical income instruments and are more likely than not to produce underperforming total returns over time.

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Matt Frankel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.