DIVO - DIVO: A Fit For Income-Seeking Investors Who Want Additional Possible Upside

2024-01-03 07:39:24 ET

Summary

• DIVO is an ETF that combines strong dividend companies with a covered call strategy for steady income and possible equity appreciation.
• DIVO has robust three-year returns and offers liquidity and sector diversification, making it suitable for various market conditions.
• DIVO's unique blend of income generation and active management makes it an appealing option for income-focused investors.

The Amplify CWP Enhanced Dividend Income ETF (DIVO) represents an interesting blend of strong dividend companies combined with a classic covered call strategy, providing possible equity appreciation with the cash inflow of the written options. DIVO's active management it as a distinctive choice for steady income, especially for those in retirement or desiring supplemental earnings.

Despite a modest one-year return, DIVO's overall performance is robust, with its three-year returns outshining many peers. It offers liquidity and a diversified sector presence, with substantial holdings in financial and technology sectors, suggesting its suitability in a range of market conditions. For investors predicting moderate growth and favoring large-cap stability, DIVO's tactical approach can leverage slowly rising markets to enhance portfolio returns.

The article details how DIVO can fit into various investor profiles, from those seeking a conservative income approach to others aiming for strategic market participation. It underscores the potential of DIVO to contribute to a diversified investment strategy, marrying income and capital appreciation in a single ETF offering.

Strategy Overview

The Amplify CWP Enhanced Dividend Income ETF is tailored to offer investors a unique blend of monthly income and potential for risk-adjusted returns , primarily through a dual stream of income generation. Its strategy combines dividends from high-quality, dividend-paying stocks and returns from a tactically implemented covered call writing strategy (more information on this strategy is given in the next section). This approach not only aims to enhance the yield but also to effectively manage downside risks.

An emphasis on selectivity is at the core of DIVO's investment philosophy. The fund predominantly invests in large-cap, high-quality companies with a proven track record of consistent dividend and earnings growth. This focus on established companies is pivotal in providing stable and potentially increasing dividend income. Complementing this is DIVO's covered call-writing strategy, which is both tactical and selective. The fund writes calls on about 20% of its holdings, allowing the remaining positions the opportunity to appreciate.

DIVO's portfolio construction incorporates a diversified approach. The fund ensures balanced exposure across traditional S&P sectors, strategically over- or under-weighting certain sectors based on market analysis and growth prospects. This diversification is critical in mitigating sector-specific risks and enhancing the overall stability of the portfolio. Moreover, DIVO stands out as an actively managed fund, differentiating itself from passive index funds. Its holdings are selected and adjusted based on various factors such as market capitalization, management track record, earnings, cash flows, and return on equity, providing the flexibility to adapt to changing market conditions.

DIVO, therefore, offers a sophisticated investment approach in the dividend-focused ETF space. Its combination of income generation from dividend stocks and an additional layer of income through a selective covered call strategy, along with active management and strategic diversification, makes it an appealing option for income-focused investors. This balance between yield pursuit and considerations for risk and capital appreciation positions DIVO as a distinctive offering in the ETF market.

Covered Call Options Writing Strategy

A covered call-writing strategy, as employed by DIVO, is an active and strategic approach to income generation within an investment portfolio. This strategy involves selling call options on stocks that the fund already owns, essentially granting someone else the right to purchase these stocks at a predetermined price, known as the strike price, within a specified timeframe.

When DIVO implements a covered call strategy, it retains ownership of the underlying stocks, which refers to the 'covered' portion of the strategy. These stocks are typically high-quality, large-cap equities that form the core of the fund's holdings. By writing, or selling, call options on these stocks, DIVO generates income from the premiums paid by the buyers of these options. This premium is essentially an extra income stream, in addition to the dividends that the stocks in the portfolio yield.

The 'call' portion of the strategy refers to the type of option that is sold. A call option gives the buyer the right, but not the obligation, to purchase the stock at the strike price before the option expires. If the stock's market price rises above the strike price, the buyer of the call option can acquire the stock at a discount to its current market value. However, if the stock price does not exceed the strike price, the option is likely to expire worthless, allowing DIVO to retain the premium income while still holding onto the stock.

The key to DIVO's approach in covered call writing is its selectivity and tactical implementation. The fund does not indiscriminately write call options across its entire portfolio. Instead, it strategically selects which stocks to write calls against, and at what times, often choosing moments when the stocks demonstrate strength or increased implied volatility. This selectivity allows for capturing some upside potential of the stocks, as not all holdings are simultaneously covered by call options.

This strategy serves multiple purposes. First, it provides an additional layer of income for the fund, supplementing the dividends from its equity holdings. Second, it can offer a degree of downside protection. In a falling market, the income from the option premiums can partially offset declines in the stock's value. However, it's important to note that this strategy also involves a trade-off. In exchange for the premium income, the fund caps the upside potential of the stocks for which the call options are written. If the stock price surges beyond the strike price, the fund may miss out on some of the gains it would have realized had it not sold the call option.

Peer Comparison

DIVO showcases strong performance , with a total return of 30.43%, placing it among the high achievers in its category. This level of return signifies the ETF's successful strategy, which combines dividend income with tactical covered call writing to enhance returns.

When placed alongside peers like FTQI, DFND, FTHI, QCLR, and SPY, DIVO's performance remains commendable. For example, FTHI posts a total return just slightly above DIVO, whereas DFND lags significantly behind, accentuating DIVO's superior performance in this segment. Furthermore, DIVO's returns are in close proximity to SPY, an ETF often used as a gauge for the broader market, suggesting that DIVO can match market performance while offering the additional benefit of an income-focused approach.

Analyzing the one-year total return metrics, DIVO has charted a growth trajectory with a return of 6.98%. This performance, while modest, underscores a steady climb in a period marked by significant economic shifts and market volatility.

In comparison to its peers within the same timeframe, DIVO's one-year return presents a mixed stance. It rests below the returns of ETFs like FTQI, which notched a 23.96% return, FTHI at 19.88%, and QCLR, which leads with a 28.12% return. The SPY, a broad market tracker, also outpaced DIVO with a 24.83% return.

This represents a notable underperformance for the year, and unfortunately is likely due to management security selection, as DIVO is much more concentrated than its peers:

Taking into account more than just performance, however, DIVO's biggest benefit over its close peers (as I define, in agreement with Seeking Alpha) is its liquidity:

Sector Diversification

DIVO presents a well-considered sector allocation within its portfolio, ensuring a level of diversification that aligns with its strategic objective of income generation combined with the potential for capital appreciation. The fund's holdings breakdown showcases a concentration in sectors that traditionally offer strong dividend payouts and the potential for steady growth.

Financials represent the most significant portion of the portfolio at 20.17%, indicating a reliance on the stable dividends and growth potential that large financial institutions often provide. The technology sector, which accounts for 15.27%, is included for its role in driving growth and innovation, alongside a growing trend of tech companies paying dividends.

The consumer defensive sector, holding 14.67%, is known for its resilience during economic downturns, offering stability to the fund's performance. Health care, with a 12.82% allocation, is included for its defensive nature and consistent demand, irrespective of economic conditions. The energy sector's 10.45% stake leverages the recent uptick in energy prices and the sector's historical propensity for robust dividends.

Additionally, the fund holds positions in consumer cyclical and industrials sectors, with allocations of 9.62% and 8.83%, respectively, balancing the portfolio with exposure to economic growth and consumer spending trends. Basic materials and communication, although smaller in proportion at 3.44% and 2.41%, are vital for their roles in foundational economic activities and the burgeoning digital communication landscape. The utilities sector, at 2.34%, is often prized for its dividend-yielding capabilities.

Notably, 6.92% of the fund is held in cash and equivalents, which may offer liquidity and a buffer during market volatility, allowing the fund managers to capitalize on opportunities as they arise.

Where DIVO Could Fit in Your Portfolio

The ideal investor for DIVO seeks a blend of consistent income and the potential for capital growth. Such an investor typically has an investment horizon that spans several years and values the regular cash flow that DIVO's monthly dividends offer. This fund appeals to retirees or individuals looking to supplement their income without forgoing the potential for equity appreciation.

Additionally, DIVO is well-suited for investors who are somewhat risk-averse yet still interested in participating in the equity markets. The covered call strategy employed by DIVO can provide a cushion against market dips, as the option premiums collected may help offset any declines in stock value, making it an attractive option for those seeking a measure of downside protection.

Investors with a strategic market perspective, who anticipate moderate growth, might find DIVO to be an apt choice for their portfolio. In an environment where high growth is not expected, the additional income from the covered calls can enhance overall returns, complementing the dividends received from the fund's equity holdings.

Moreover, those looking for diversification in their income-generating investments, especially in a low-interest-rate environment, may turn to DIVO. The fund's income does not solely rely on bond yields or traditional dividend stocks, as it incorporates a covered call-writing strategy to diversify its income streams.

Finally, an investor who believes in short-term modest price increases in the overall market without significant volatility but prefers the safety of large-cap names could use DIVO as a tactical piece to their overall portfolio implementation strategy. Slowly rising markets are where the covered call strategy gains are the largest, as there is still price appreciation from the underlying portfolio but also the premium gained from unexercised written call options.

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