The Amplify CWP Enhanced Dividend ETF (symbol: DIVO) is one of the larger covered call exchange-traded funds (ETFs) in the market and is quite popular with retail investors. DIVO employs a covered call strategy, which attempts to generate income by selling the upside potential of its portfolio. While covered calls may make sense in certain situations, my observation is that individual investors do not typically fully understand the dynamics of the strategy or the trade-offs in terms of risk and return. Hopefully, the below can help investors evaluate whether DIVO is a good investment for their portfolio.
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The Short Answer
DIVO may be a good tool in very rare specific situations, but DIVO is not a good investment for many other situations. Covered call strategies (including DIVO) carry a specific and well-known set of tradeoffs that many investors do not necessarily fully understand or consider the implications. Even if I were to invest in a covered call strategy, I probably would not use DIVO.
DIVO Performance
The first thing most investors want to know about is performance, so we will start there. According to Bloomberg, since the fund’s inception in late 2016, DIVO has returned 11.85% per year which is below the S&P 500’s performance of 13.32% over the same time period.
As the DIVO chart of historical performance below shows, DIVO has not materially outperformed in any year except 2022. DIVO outperformed in 2022, when equity markets experienced a lot of volatility, but began to underperform again in 2023. This is not surprising and exactly what I would expect from a covered call fund as the strategy is to sell upside potential in exchange for cash which helps offset downside losses. So I would expect DIVO to underperform when equity markets are doing well, outperform when equities are volatile, and generally underperform over longer time horizons (especially on an after-tax basis).
In terms of risk and drawdowns, DIVO’s downside has been slightly more limited (as has its upside though). The peak-to-trough decline of DIVO’s total return was down “only” 27.75% in 2020, while the S&P 500 was closer to 31.5%. That being said, the S&P’s prior outperformance meant that its larger decline only brought the total return down to DIVO’s level (rather than below it). My view is that writing covered calls does not provide that much (if any) downside protection because of the general underperformance relative to the underlying. This is not necessarily intrinsically good or bad, but investors should be aware.
DIVO Risks
DIVO owns stocks which are more volatile than cash or bonds. While the returns are higher than cash or bonds, investors need to be prepared to stomach volatility and be able to hold for the longer-term. DIVO was down nearly 28% at one point in 2020. This is not necessarily worse than other similar funds, but it is a characteristic of stocks that investors need to be aware of.
DIVO Portfolio
Fund performance is ultimately driven by a fund’s holdings and exposures, so our DIVO review will examine these items.
DIVO Holdings
DIVO (and its underlying index) is relatively concentrated and does not hold very many stocks. This represents the large-cap segment of the US stock market.
| DIVO | S&P 500 | |
| Number of Stocks | 24 | 503 |
DIVO Country Exposures
DIVO only owns US-based companies. Investors looking for international exposure may pair DIVO with international ETFs or simply hold a global ETF.
DIVO Market Cap Exposure
DIVO is primarily a large-cap fund which seeks to represent the largest US stocks. Even though the fund holds some mid-caps, performance is primarily driven by the large-cap exposure.
| DIVO | |
| Large-Cap | 96% |
| Mid-Cap | 3% |
| Small-Cap | 0% |
DIVO Sector Exposures
DIVO is not very diversified across sectors nor does it mirror the approximate weights of the broad US stock market.
| DIVO | |
| Basic Materials | 1.18% |
| Consumer Cyclical | 11.76% |
| Financial Services | 17.40% |
| Real Estate | 0.00% |
| Communication Services | 1.86% |
| Energy | 10.96% |
| Industrials | 11.69% |
| Technology | 11.08% |
| Consumer Defensive | 14.81% |
| Healthcare | 15.95% |
| Utilities | 3.31% |
Expenses
No review of DIVO would be complete without an in-depth look at the explicit and implicit costs of trading and holding DIVO.
DIVO Expense Ratio
DIVO’s expense ratio of .55% is quite a bit higher than most domestic index ETFs, but this is not surprising for a more active strategy.
DIVO Transaction Costs
ETFs are free to trade at many brokers and custodians, so DIVO should be free to trade in most cases. Additionally, it is relatively liquid. The bid-ask spread of DIVO is about .1%, so individual investor trades will not generally be large enough to impact or move the market.
DIVO Tax Efficiency
DIVO is not very tax-efficient as the premiums received from selling calls are taxed at ordinary income rates. While some investors may not mind receiving income in lieu of potential upside, this is akin to converting capital gains (from appreciation) into ordinary income. Of course, a covered call strategy will lose less money if the market declines, but covered call strategies (including DIVO) have a large tax drag.
ETFs are typically more tax-efficient than mutual funds, due to their ability to avoid realizing capital gains through like-kind redemptions (a process that is beyond the scope of this post). However, DIVO has made capital gains distributions and I would not necessarily say that the fund is tax efficient since covered call strategies essentially convert capital gains into ordinary income.
DIVO Premium Costs
Many retail investors focus on the premiums that are received from selling calls. However, investment returns need to calculated net of costs. If an investor sells a call for $3 and buys it back for $1, the return is $2 rather than $3. Of course, if the underlying stock goes up, an investor may have to buy the call back at $5 (as an example). Premium costs vary over time, so investors may want to evaluate total return rather than just premiums received.
DIVO Review: A Recap
The above review of DIVO illustrates that DIVO is a typical covered call strategy. It gained quite a bit of popularity and assets during the bear market of 2022, but covered call strategies are not for everyone (including yours truly). I would not personally invest in DIVO nor would I recommend it to anyone else, unless they fully understand covered calls and the performance and tax implications.
