Amplify CWP Enhanced Dividend Income ETF DIVO takes a unique approach to covered calls, but overreliance on manager skill and limitations of its approach call into question its ability to maintain a long-term edge. 

The managers at Capital Wealth Planning apply an options overlay to a stock portfolio to maximize both risk-adjusted return and yield. The stock portfolio of 20-30 names comprises large-cap companies with historical dividend and earnings growth, emphasizing quality in that market. The managers then sell short-dated calls against a select few to maximize options premium income while simultaneously hedging overvalued positions. The pace at which the team writes calls varies depending on market conditions, but generally they sell calls only against stocks that offer attractive premiums or are overpriced. Call options are typically sold with maturities of two to three weeks, and sometimes up to 30 days.

There is considerable manager discretion embedded in both the equity portfolio and the options overlay. In the equity portfolio, the managers seek a narrow group of stocks that are fundamentally sound while also rotating sector biases based on macro conditions. The managers liked financials at the expense of technology in early 2024. Each stock begins with a roughly 3% weighting that can be nudged up or down based on the managers’ view of a company’s prospects. High-conviction names can receive up to a 5% weight. 

Despite the narrow portfolio of hand-selected, high-quality companies, the options overlay limits the positive impact certain stocks may have on returns. By selling calls against five to 10 of them, the managers are choosing to forgo much of their potential upside and collect the options premium instead. This premium can be more reliable than potential rising prices, but it caps a stock’s possible upside. 

Since its inception, the team at Capital Wealth Planning has proved effective at operating the fund to its mandate. It consistently achieves a higher yield than the US market while also controlling risk. It may not earn as high a payout as some derivative income Morningstar Category peers who sell index call options against their whole portfolio, but this fund maintains much greater upside potential. There’s a trade-off between return, risk, and income. So far, the fund has delicately walked that line. Long-term returns have been better than its benchmark CBOE S&P 500 BuyWrite Index and the category average with only slightly higher volatility than both.

Analyst Rating

An active approach to covered calls.

Analyst

Zachary Evens

UnitedHealth Group

Microsoft

Walmart

Goldman Sachs

Caterpillar

Procter & Gamble

Visa

Home Depot

McDonald's

JPMorgan Chase & Co

Manager discretion plays an important role in this strategy. A narrow portfolio of 20-30 stocks coupled with an opportunistic options overlay translate to a high-yielding portfolio. But writing calls can work against the best-performing picks in this high-conviction approach that has a lot of moving parts. These considerations merit an Average Process Pillar rating.

Average

Process

Subadvisors Capital Wealth Planning and Penserra Capital are responsible for the execution and implementation of this strategy. Managers from both firms are experienced in exchange-traded fund and options management, but both lack a strong supporting infrastructure to stand out against larger competitors. The fund earns an Average People Pillar rating.

There are five named portfolio managers, two from CWP and three from Penserra. Each has been listed on the ETF since its 2016 inception. CWP and its two managers, Kevin Simpson and Josh Smith, are the architects of the strategy. Simpson is the founder of CWP and boasts decades of experience running options-based and discretionary active equity strategies. A lean shop, CWP has four investment professionals helping to manage just four strategies, including this one. Simpson has been instrumental in the successful management of both the ETF and SMA, which launched in 2013.

Portfolio decisions from CWP are implemented by managers and traders at Penserra. Penserra is a relatively smaller subadvisor with limited scope that handles trading and execution for niche ETF issuers. Only a handful of investment personnel manage the 40 ETFs and $7.2 billion currently under its remit, but the three portfolio managers from Penserra—Dustin Lewellyn, Ernesto Tong, and Anand Desai—are cross-trained to minimize the impact of any absences. 
Manager compensation at both firms is not tied to fund performance.

People

While differentiated from much of the competition, Amplify ETFs' concentrated lineup of largely thematic exchange-traded funds harbors considerable risk. It earns a Below Average Parent Rating.

Amplify targets niches not previously explored by larger ETF firms. This leads to product launches in relatively narrow parts of the market like cannabis, online retail, and battery technology. A recent acquisition of 12 mostly thematic ETFs from ETF Managers Group only enhances this focus. Products like these tend to be extremely concentrated and volatile, inviting significant risks to their investors, not the least of which are ill-timed purchases and sales. Because of these risks, product success is unpredictable and leads to more closures than there are among traditional strategies. Since its 2016 founding, Amplify has merged or liquidated several ETFs that failed to gain traction or produced poor results.

Five subadvisors are responsible for the day-to-day management of Amplify's 29 ETFs. The firm regularly reviews subadvisor activity and performance and risk data but does not have a dedicated risk management team. Overall, its subadvisory relationships seem to emphasize product development and distribution rather than long-term, proven investment merit.

Amplify ETFs does what it sets out to do—offer investors differentiated ETF strategies—and leadership comes with considerable ETF experience. The firm's ETFs are not cheap but neither are they particularly pricey. Many levy category-competitive fees. Few of Amplify's ETFs should be considered core holdings, but they can serve a purpose for investors seeking specific exposures so long as shareholders understand the risks embedded.

Below Average

Parent

Amplify CWP Dividend & Option Income ETF

DIVO is an actively-managed ETF that provides income by selecting stocks from the S&P 500 Index overlaid with a tactical call writing strategy.

Since the publication of my article back in mid-2023, the Amplify CWP Enhanced Dividend Income ETF has performed in line with other dividend-focused vehicles. Yet, as I indicated in the article, DIVO has failed to register alpha relative to the S&P 500 due to the limitations stemming from its covered call strategy. Now, the rise in the VIX and increased market volatility provide a more sustained base for option richness, allowing DIVO to generate more sizeable cash flows.

DIVO: Higher For Longer And Elevated Volatility Make It A Buy Now (Rating Upgrade)

Amplify's Enhanced Dividend ETF offers a higher dividend yield compared to alternatives like SCHD and VIG. DIVO focuses on large cap growth and value stocks with a history of growing dividends. The fund also uses an option strategy with covered calls. DIVO provides monthly dividend distributions, making it ideal for investors nearing or in retirement who rely on income.

DIVO: Great Alternative Dividend ETF To SCHD

DIVO is a U.S. dividend income ETF focusing on blue-chip stocks, and selling covered calls on a small portion of its holdings. It offers investors an above-average 4.6% yield, and a reasonably good performance track-record. Potential capital gains are strong too, unlike most covered call and bond ETFs.

DIVO: Strong U.S. Dividend Income ETF, Above-Average 4.6% Yield

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DIVO: Designed To Outperform JEPI

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.

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The Amplify CWP Enhanced Dividend Income ETF has outperformed popular dividend-focused ETFs SCHD and VYM in 2023. DIVO's strategy of blending traditional income investing with covered call options has resulted in a higher yield and better downside risk mitigation. I'm bullish on DIVO in 2024, predicting that dividend stocks will come back into favor as interest rates decline and more capital flows into the equity markets.

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Amplify ETFs Declares November Income Distributions for its ETFs

Amplify CWP Enhanced Dividend Income ETF (DIVO) has a dividend yield close to 5% with limited covered call writing. DIVO's holdings consist mostly of Dow Jones Index components, which may result in performance matching that of the Dow Index. While DIVO holds stocks with a strong history of dividend growth, its own dividend distribution history has been disappointing.

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The Amplify CWP Enhanced Dividend Income ETF has lagged the S&P 500 Index this year, mostly due to its limited exposure to the "Magnificent 7" stocks. The Magnificent 7 have contributed over 100% of the market's returns this year, and funds that are underweight them have lagged. History suggests that the current market concentration is unsustainable, and DIVO's portfolio of fundamentally chosen stocks should outperform in the long run.

DIVO: Stay The Course; Maintain Buy Rating

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Back in March, I said I thought DIVO would underperform risk assets, and it has. DIVO has historically performed well in the last three months of the year, but current sentiment suggests that growth-oriented stocks may outperform. Sentiment is too negative, and I prefer being bullish on risk assets rather than DIVO.

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