💥The Amplify CWP Enhanced Dividend Income ETF (DIVO): Double-Barrelled Income in a Single Package

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Hello, ETF UNO community! Today, we're examining the Amplify CWP Enhanced Dividend Income ETF $DIVO ( ▲ 0.38% ) . This ETF aims to provide both income and growth by combining dividend-paying stocks with options strategies. With a dividend yield of 4.7% and a five-star Morningstar rating since its 2016 launch, DIVO has certainly garnered attention. Let's briefly explore what makes DIVO stand out if it belongs in your portfolio.

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What is DIVO?

DIVO stands out in the crowded income ETF space for two compelling reasons: double income potential and lower volatility, unlike traditional dividend ETFs, which rely solely on stock distributions, or covered call ETFs, which sacrifice upside for income, DIVO attempts to thread the needle between both strategies.

The fund's strategy, guided by Capital Wealth Planning (CWP), is the "Enhanced Dividend Income Portfolio" (EDIP). CWP aims for a gross income of about 2-3% from dividends and 2-4% from option premiums, along with potential capital appreciation. This dual-income approach provides flexibility: if dividend growth slows, option premiums can help compensate, and vice versa.

The lower volatility comes from the covered call overlay, which offers protection against market downturns while generating consistent income. When markets rise, you'll see a positive return, though it may be lower than the overall equity market returns, which is something you can anticipate.

DIVO's strategy follows a methodical four-step approach that sets it apart from both passive dividend ETFs and systematic covered call strategies:

1. Dividend Growers: DIVO places a strong emphasis on owning high-quality, large-cap companies with a history of dividend and earnings growth. The fund screens companies from the S&P 500 universe, focusing on those with consistent dividend increases and strong fundamental metrics.

2. Sector Allocation: DIVO is relatively balanced across the traditional 10 S&P sectors, with CWP determining which sectors to over- or under-weight based on various factors. This ensures diversification while allowing for tactical positioning based on market cycles.

3. Security Selection: DIVO consists of 20-25 stocks that are screened and adjusted according to key attributes, including market capitalisation, management track record, earnings, cash flow, and return on equity. This concentrated approach enables more impactful stock selection while maintaining high-quality standards.

4. Tactical Covered Call Writing: Here's where DIVO gets interesting. Unlike most index-based covered call ETFs that write calls automatically at set times, DIVO's actively managed approach not only allows the manager to monitor holdings daily to ensure they meet quality and valuation metrics but also provides the flexibility to take advantage of timely opportunities by writing calls on individual stocks.

Investment Strategy📊

DIVO occupies a unique niche that makes it suitable for several portfolio roles, but it's not a one-size-fits-all solution. Here are three strategic approaches to consider:

• 🤑The Income Replacement Strategy: For investors transitioning from growth to income phases, DIVO can serve as a bridge. Its combination of dividend stocks and option income provides more immediate cash flow than pure dividend growth ETFs while still offering some upside participation.

• 🧱The Defensive Allocation: In a balanced portfolio, DIVO can function as your "defensive equity" allocation. Its lower volatility profile makes it suitable for the portion of your equity allocation where you want some market participation but with reduced risk. A typical implementation is 15-25% of your equity allocation, paired with growth-oriented ETFs and international exposure.

• 🛰️The Core-Satellite Approach: For more sophisticated investors, DIVO works well as a satellite holding around a core of broad market ETFs. Its active management and tactical approach can add alpha during certain market conditions, particularly when volatility is elevated, but markets aren't in free fall.

DIVO at a glance

ETF Issuer: Amplify

Inception: 2016-12-14

Asset Class: Equity

Underlying Index: DIVO is an active ETF

Geographical Focus: U.S.

Expense Ratio: 0.56% (as of last data point)

Dividend Yield: 4.73% (as of last data point)

Distribution Frequency: Monthly

Historical Performance

DIVO has shown a strong track record since its inception, achieving an annualised return of 11.7% over the past five years.

Its ability to generate income while capitalising on market gains has been especially evident during periods of strong market performance. With low VIX levels, DIVO refrains from writing call options, allowing for greater upside potential compared to traditional covered call strategies. This flexibility has enabled DIVO to better capitalise on bull markets.

ETF Radar View

The radar chart below shows the general characteristics of the ETF:

Top 3 Reasons to Invest

1. Active Management That Adds Value: Unlike many actively managed funds that struggle to justify their fees, DIVO's tactical approach to both stock selection and options overlay has demonstrably added value. DIVO is more actively managed, both in terms of stock selection and the call writing strategy. The fund's five-star Morningstar rating reflects this outperformance on a risk-adjusted basis.

2. Flexibility to Adapt to Market Conditions: DIVO's tactical approach enables it to adapt to changing market environments. During periods of low volatility, the fund can reduce covered call activity and capture more upside. When volatility spikes, it can increase the attractiveness of options writing as a means to enhance income. This flexibility is something systematic strategies cannot match.

3. Quality Dividend Growth Foundation: The underlying portfolio consists of high-quality dividend growers, not just high-yield stocks. The top holdings are typically companies with robust business models and expanding dividend streams.

Top 3 Reasons Not to Invest

1. Concentration Risk: With fewer than 30 holdings, DIVO is significantly more concentrated than broad market ETFs. This concentration may concern some, as a drop in one of the holdings could affect returns. While the holdings are of high quality, this concentration results in higher individual stock risk.

2. Upside Limitation: Despite its tactical approach, DIVO will still underperform in strong bull markets due to its use of a covered call overlay. The options strategy inherently caps upside potential in exchange for income and reduced volatility. Growth-oriented investors may find this trade-off unappealing.

3. Tax Inefficiency in Taxable Accounts: The monthly distributions from both dividends and option premiums create tax drag in taxable accounts. This is especially true in a taxable environment where DIVO's tax drag will be larger because you're taxed on every distribution, regardless of whether or not you reinvest it.

⭐DIVO: The 5-Star Income ETF

DIVO represents a sophisticated approach to income investing that seeks to address the classic dilemma of dividend investors: how to generate meaningful current income without compromising future growth potential. The fund's tactical covered call strategy, combined with its foundation of quality dividend growers, offers a compelling value proposition for the right investor.

The key question is whether you're the right investor. DIVO works best for those who need current income, can tolerate some concentration risk, and appreciate active management when it adds value. It's less suitable for growth-focused investors or those who prioritise tax efficiency above all else.

With its proven track record, five-star rating, and unique positioning in the income space, DIVO deserves serious consideration from income-oriented investors. Just remember that no single fund is perfect – DIVO's strengths in income generation and downside protection come with trade-offs in concentration and upside limitation.

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DISCLAIMER: This article is for informational purposes only and should not be considered as investment advice. Always conduct your own research and consult with a financial advisor before making investment decisions.