In February, the Kurv Yield Premium Tesla (TSLA) Strategy ETF, distributed $0.3130 per share to investors. This amount was lower than the prior month’s distribution of $0.5555 per share. While most managers would not highlight a lower distribution yield, we felt this was an opportunity to dive into characteristics of the Kurv Yield Premium Tesla (TSLA) Strategy, as well as share Kurv’s investment philosophy and approach to covered call strategies.  

For Kurv’s Yield Premium Strategy suite, we adhere to three guiding investment principles:

Balanced:  We harvest what the market gives us to seek an optimal balance between income generation and price appreciation potential

Sustainable: We distribute premiums harvested from writing calls, and never source distributions from NAV

Tax-Aware:  We focus on after-tax total returns and manage the distributions in a tax-advantaged manner (For example, option premium distributions are categorized as return of capital and, therefore, may not be immediately taxable. Distributions may benefit from receiving long-term capital gains treatment, depending on the holding period)

Kurv Yield Premium Strategy ETFs (and covered call strategies in general) sell a call option on an underlying equity position that is already held. Historically, there is a volatility premium where the implied volatility of an option is greater than the realized volatility of the underlying asset.  Because of this difference between implied versus realized volatility, investors who sell options can earn a premium and capture this risk premia.

In addition, when implied volatility is higher, options sellers can generally earn a higher premium. When implied volatility is lower, options sellers receive a lesser premium, all else being equal. As implied volatility rises, there is also a drag effect on existing short call positions.  

Specifically for TSLA options, we can see that implied volatility (chart below) was around low to mid 40s throughout November. From mid December on, implied volatility increased in anticipation of upcoming Q4 earnings, with a significant upwards move around the end of January.  

On January 24, 2024, TSLA earnings came in below expectations, leading to a single day drop of 12.13% of the stock the next day, driving realized volatility significantly higher.  This decreased the volatility premia offered by the options market, and as such, the premiums harvested by covered call strategies were diminished. This lower option premia environment resulted in lower distributions from the Kurv Yield Premium Tesla (TSLA) Strategy ETF in February. This lower option premia environment resulted in lower distributions from the Kurv Yield Premium Tesla (TSLA) Strategy ETF in February. Managers who target a distribution yield, will most likely distribute beyond the premia harvested during the month into the capital of the fund, leading to NAV erosion. At Kurv, we aim our best to smooth our distribution as best as we can, however, we stick to our root of institutional and highly disciplined investment management philosophy not to over distribute beyond what the market gives us.

From a total return perspective, the Kurv Yield Premium Tesla (TSLA) Strategy ETF returned -18.33% for the period from Dec. 31, 2023 to Feb. 19, 2024, outperforming TSLA stock by 120 basis points. TSLA stock returned -19.53% for the same period. During periods where the underlying stock is falling, covered call strategies can be expected to outperform, as well as exhibit lower volatility relative to the underlying stock.  

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In conclusion, investors will receive a lower distribution yield for the Kurv Yield Premium Tesla (TSLA) Strategy ETF this month.  As highlighted in our recent piece, “The Perils of Yield Annualization”, as well as Jason Zweig’s WSJ article from Feb. 16th, distribution yield can be misleading as it takes a backwards looking approach (distribution yield uses the distribution amount paid out in the most recent month, multiplies it by 12, and divides by the fund’s net asset value).  We believe when evaluating yield-oriented strategies, investors should consider both the monthly distribution-per-share, as well as the total return of the strategy, thus providing a clearer picture of the strategy’s performance without taking into account forward-looking assumptions.  

For any questions or comments, please reach out to us at info@kurvinvest.com or visit us at kurvinvest.com.  

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The performance data quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than the performance quoted. High short-term performance may be unusual, and investors should not expect such performance to be repeated. Performance of less than one year is cumulative. For the standardized performance and prospectus of each ETF, please click on the corresponding ticker: TSLP | NFLP | AAPY | GOOP | AMZP | MSFY

THIS MATERIAL MUST BE PRECEDED OR ACCOMPANIED BY A PROSPECTUS. Investors should consider the investment objectives, risks, charges and expenses of the ETF carefully before investing. To obtain an ETF’s prospectus containing this and other important information, please call (833) 955-5878 or view/download a prospectus here: TSLP | NFLP | AAPY | AMZP | GOOP | MSFY. Please read the prospectus carefully before you invest.

The Fund may not be suitable for all investors. There is no guarantee that the Fund’s investment strategy will be properly implemented, and an investor may lose some or all of its investment. In addition, an investor may lose its investment even if the strategy is properly implemented.

Kurv ETFs are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Total Returns are calculated using the daily 4:00pm EST net asset value (NAV). Market price returns reflect the midpoint of the bid/ask spread as of the close of trading on the exchange where Fund shares are listed. Market price returns do not represent the returns you would receive if you traded shares at other times.

The distribution yield an investor would receive if the most recent fund distribution remained the same going forward. The distribution yield represents a single distribution from the Fund and is not a representation of the Fund’s total return. The distribution yield is calculated by multiplying the most recent distribution by 12 in order to annualize it, and then dividing by the Fund’s NAV.

Sector risk – The market value of securities in the energy sector may decline for many reasons, including, among others, changes in energy prices, energy supply and demand, government regulations and energy conservation efforts. The energy sector has recently experienced increased volatility. In particular, significant market volatility in the crude oil markets as well as the oil futures markets resulted in the market price of the front month WTI crude oil futures contracts falling below zero for a period of time. The demand for energy and petrochemicals is generally linked closely with broad-based economic activities and levels of prosperity. The occurrence of recessions or other periods of low or negative economic growth will typically have a direct adverse impact on our results. Financials Sector Risk. Performance of companies in the financial sector may be adversely impacted by many factors, including, among others, government regulations, economic conditions, credit rating downgrades, changes in interest rates, and decreased liquidity in credit markets. The impact of more stringent capital requirements, recent or future regulation of any individual financial company, or recent or future regulation of the financial sector cannot be predicted. The market prices of technology related securities tend to exhibit an increased volatility and risk.  Technology securities may be affected by intense competition, obsolescence of existing technology, general economic conditions and government regulation and may have limited product lines, markets, financial resources or personnel.

Single stock  risks – The Funds do not invest directly in underlying stocks.

Investing in the funds involve a high degree of risk.

Single Issuer Risk. Issuer-specific attributes may cause an investment in the Funds to be more volatile than a traditional pooled investment which diversifies risk or the market generally. The value of the Fund, which focuses on an individual security, may be more volatile than a traditional pooled investment or the market as a whole and may perform differently from the value of a traditional pooled investment or the market as a whole.

The Fund’s strategy will cap its potential gains if underlying shares increase in value. The Fund’s strategy is subject to all potential losses if underlying shares decrease in value, which may not be offset by income received by the Fund. The Fund may not be suitable for all investors..

Fixed income risks – Investments in debt securities are subject  to credit risk which refers to the possibility that the issuer or other obligor will default on payments. Generally, the value of debt securities will change inversely with changes in interest rates.

Exchange Traded Funds (“ETF”) are afforded certain exemptions from the Investment Company Act. The exemptions allow, among other things, for individual shares to trade on the secondary market. Individual shares cannot be directly purchased from or redeemed by the ETF. Purchases and redemptions directly with ETFs are only accomplished through creation unit aggregations or “baskets” of shares. Shares of an ETF, traded on the secondary market, are bought and sold at market price (not NAV). Brokerage commissions will reduce returns. Investment policies, management fees and other information can be found in the individual ETF’s prospectus.

Buying or selling ETF shares on an exchange may require the payment of fees, such as brokerage commissions, and other fees to financial intermediaries. In addition, an investor may incur costs attributed to the difference between the highest price a buyer is willing to pay to purchase shares of the Fund (bid) and the lowest price a seller is willing to accept for shares of the Fund (ask) when buying or selling shares in the secondary market (the bid-ask spread). Due to the costs inherent in buying or selling Fund shares, frequent trading may detract significantly from investment returns. Investment in Fund shares may not be advisable for investors who expect to engage in frequent trading. Premium/Discount is the difference between the market price and NAV expressed as a percentage of NAV.

Current holdings are subject to risk. Holdings are subject to change at any time. An investment in an ETF involves risk, including the loss of principal. Investment return, price, yield and Net Asset Value (NAV) will fluctuate with changes in market conditions. Investments may be worth more or less than the original cost when redeemed.

Derivatives Risk. Derivatives are financial instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with directly investing in securities or other ordinary investments, including risk related to the market, imperfect correlation with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of availability, counterparty risk, liquidity, valuation and legal restrictions.

New Fund Risk. The Fund is a recently organized management investment company with no operating history. As a result, prospective investors do not have a track record or history on which to base their investment decisions.

Active Management Risk. The Fund is actively managed, which means that investment decisions are made based on investment views. There is no guarantee that the investment views will produce the desired results or expected returns, which may cause the Fund to fail to meet its investment objective or to underperform its benchmark index or funds with similar investment objectives and strategies.

Distributor for Kurv ETFs: Foreside Fund Services, LLC

Options are financial derivatives that give buyers the right, but not the obligation, to buy or sell an underlying asset at an agreed-upon price and date.

Implied volatility is a measure of the market’s expectations regarding the future volatility of a financial instrument, such as a stock or an option. It is derived from the prices of options and reflects the market’s consensus on the potential price fluctuations of the underlying asset. High implied volatility suggests greater expected price swings, while low implied volatility indicates the opposite.

Realized volatility also known as historical volatility, measures the actual price fluctuations of a financial instrument over a specific past period. It is calculated by analyzing the historical price movements of an asset, often using standard deviation or other statistical methods. Realized volatility provides insight into how much an asset’s price has changed in the past and can be useful for assessing the risk associated with a particular investment.

Basis Points or bps is a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%

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