Amplify ETFs expanded its small but growing lineup of income-focused exchange-traded funds with the recent launch of the Amplify YieldShares CWP Dividend & Option Income ETF (DIVO).
As its name implies, the fund’s portfolio seeks income from dividend paying stocks and by writing covered calls on those stocks. DIVO follows an investment strategy called Enhanced Dividend Income Portfolio, or EDIP, a strategy employed in separate accounts by the fund’s sub-adviser, Capital Wealth Planning, a fee-only investment advisory firm in Naples, Fla.
According to fund literature, the investment process underlying the DIVO fund starts with identifying large-cap, high quality, blue-chip S&P 500 companies that the investment manager believes can sustain their earnings and cash flow growth while increasing their dividends over time.
The portfolio contains roughly 20 to 25 dividend-paying stocks that are outperforming relative to their peers within each of the ten major market sectors. Typically, exposure to any one sector won’t exceed 25 percent and the maximum weight of each holding is 8 percent. This is an actively managed fund where Capital Wealth Planning manages sector allocation and adjusts the portfolio holdings on an ongoing basis as various investment metrics change.
It aims to reduce risk and boost total returns by selling short-term call options on some, or all, of the individual stocks in the portfolio. Unlike a systematic covered call program, Amplify says, the strategy is not obligated to continuously cover each individual equity position.
Add it up, and DIVO strives to generate annual income of between 4 percent and 7 percent, along with the potential for capital appreciation. According to the fund’s prospectus, the expected income breakdown would be 2 percent to 3 percent from dividend income and 2 percent to 4 percent from option premiums.
Also according to the prospectus, as of September 30, 2016 the DIVO fund's underlying EDIP strategy's annualized net return since inception on January 1, 2013 was 10.81 percent. Among the two benchmarks provided in the prospectus, that trailed the 12.06 percent annualized total return during that periold by the Dow Jones Industrial Average but beat the 7.54 percent annualized return reported by the CBOE S&P 500 BuyWrite Index.
Amplify posits that the fund’s dividend and option income may provide lower share price volatility and downside protection versus the overall market during times of broad-based market declines.
The DIVO fund’s expense ratio is 0.95 percent.
Based in Downers Grove, Ill., Amplify Investments is a registered investment advisor that constructs ETFs based on distinct investment strategies from index providers and asset managers. In September, it bought fund sponsor YieldShares, a small product provider focused on income-oriented investment strategies.