Why this 94% dividend yield ETF is a Terrible Investment

There has been a massive influx of high yield dividend paying ETFs that have joined the market in the past couple of years. The problem is some of these ETF may have great dividend yields but keep on dropping in share price for a number of reasons. In this article I will specifically be talking about is TSLY which currently has a 94% dividend yield.  TSLY was created by Yieldmax on October 22, 2022 and its purpose is to produce a high dividend yield that pays out monthly. It currently pays a whopping 94.95% dividend yield! This means for every 100$ you invest it should (the dividend yield fluctuates so this isn't guaranteed as we'll discuss soon) pay you 94.95$ in dividends per year. The way it works is by buying call options and selling put options to mimic Tesla's price movement. They also sell covered calls and have short positions which have cash and U.S bonds as collateral for it if the strategy takes a wrong turn. All the money TSLY generates from the premiums on the options are paid out as a dividend. So if Tesla is less volatile, TSLY will earn less in premiums which means that the dividend will be smaller. So this means the dividend can rise and fall greatly depending on the premiums that they can collect. TSLY's Performance  TSLY's share price has done incredibly poorly since being created. To show how badly it performed I used a portfolio visualizer to compare the S&P to TSLY. The comparison started on November 30, 2022 and I put $10,000 into both of them and reinvested all of the dividends. Even with reinvesting all the dividends back into TSLY (which should've been a big advantage since it's dividend yield is so much higher) it underperformed dramatically. The S&P ended up with $13,128 and TSLY ended with $7,998.

I'll now compare TSLY to QYLD, which is probably the most famous covered call ETF using the same metrics as before. Even when comparing TSLY to QYLD, TSLY still majorly underperformed. QYLD returned $12,665

So as you can see TSLY underperformed quite badly whether you compare it to the market or compare it to another covered call ETF. Now I'll explain some reasons about why TSLY has underperformed so badly. Tesla's Performance  The main reason for TSLY's underperformance is because of how badly Tesla has been doing. Since TSLY was created Tesla is down 32.99% which is obviously worse than the S&P. As TSLY follows Tesla it will lose money just like Tesla does. I personally think Tesla will continue to underperform the market as they are trading at a much higher multiple than their competitors. They currently have a P/E ratio of 40.6 while ford has a P/E of 12 and Volkswagen has a P/E of 5.24. Unless Tesla can perform way better than these companies it's likely it's P/E ratio will go down which means its share price will decrease. Tesla has already been underperforming compared to its P/E as their sales are already declining while lowering the prices of their vehicles. If Tesla continues to underperform it will really hurt TSLY as Tesla's share price directly correlates with TSLY. NAV Erosion Another reason why TSLY is down is because of its dividend which erodes the net asset value of the fund. When dividends are paid out it reduces the net asset value of the fund which in turn lowers the amount of money the fund can use to generate future profits. TSLY's net asset value has fallen -13.48% since it was created. As TSLY continues paying out these massive dividends it'll continue losing NAV. Dividend Inconsistency  While this isn't part of the reason why TSLY is down it is something investors have to look at. As TSLY makes money by either Tesla going up and their options being worth more or when Tesla is very volatile and they get higher premiums on the options they sell. Because of this the dividend swings drastically month by month. 

As you can see in the picture above in the past 11 months the dividend has been as high as $2.13 and as low as $0.68. As most dividend investors hope to retire with dividends, having a inconsistent yield will make dividend investors think twice before investing. As you can see TSLY has greatly underperformed the market and even if you like it's massive dividend it doesn't make up for the capital gains loss.