Tesla & Nvidia ETFs: High Yields, But Is It Worth It?

This article explores two ETFs, YieldMax NVDA Option Income Strategy ETF (NVDY) and YieldMax TSLA Option Income Strategy ETF (TSLY), which offer substantial dividends from popular stocks like Tesla and Nvidia. While their high yields are appealing, it's crucial to understand the underlying strategies and potential drawbacks before considering these ETFs.

The Appeal of High Yields

The ETFs provide dividend yields of 84% for NVDA and 77% for TSLY, attracting income-oriented investors. These high yields stem from the use of options strategies to generate income. However, a dividend yield exceeding 70% is inherently risky and requires careful consideration.

• While enticing, these yields are not necessarily sustainable.
• Investors must understand the risks involved before investing.

How These ETFs Work

YieldMax ETFs do not directly hold shares of the underlying stocks like Tesla or Nvidia. Instead, they invest in Treasury securities to generate collateral for creating options spreads. Two primary strategies are employed to generate income:

• Standard strategy: Selling call and put options on the underlying stock, aiming to generate income.
• Opportunistic strategy: Selling at-the-money call options and buying out-of-the-money call options, allowing for some upside potential if the stock price increases.

Potential Scenarios

The success of these strategies depends on the movement of Tesla and Nvidia stocks:

• Slow and Steady Rise: The best scenario where the ETF's share price might rise gradually over time. The call options sold expire worthless, generating income for the fund.
• Decline or Flat Performance: The ETF might lose value but could potentially outperform simply holding the underlying stock.
• Strong Stock Performance: The ETF's gains are capped by the strike prices of its options positions, potentially resulting in underperformance compared to the underlying stock.

Analyzing Past Performance

While Nvidia experienced a remarkable 168% increase in the past year, the NVDA ETF only gained 5%. This illustrates that despite the high yield, the ETF might not match the performance of simply owning Nvidia stock.

Tesla's decline of 17% over the past year resulted in a 55% loss for the TSLY ETF. Even with dividends, the ETF's total return was negative 18%, mirroring the underlying stock's performance.

Conclusion

YieldMax ETFs are best suited for investors who believe a stock will rise gradually with low volatility over time. Both the NVDA and TSLY ETFs underperformed their respective underlying stocks in recent scenarios, highlighting the limitations of their options-based strategies.

• Limit position size when investing in these ETFs.
• Consider turning off automatic dividend reinvestment due to potential share price decline.

Should You Invest in Tesla-Related ETFs?

Before investing in these ETFs, consider if they align with your investment goals. Alternatively, the Motley Fool Stock Advisor suggests 10 best stocks for investors, which may offer potential for higher returns.

• Evaluate your investment strategy and risk tolerance.
• Research alternative investment opportunities that might align better with your goals.