ETF Alert: DIVO Covered Call Fund Downgraded to Sell Amid Economic Uncertainty

New York, NY – As the investing and economic landscape continues to face increased volatility, navigating through uncertainties in growth forecasts, an upcoming presidential election in the US, and the Federal Reserve’s commitment to maintaining high rates becomes more challenging.

With the S&P 500 and other major indexes hovering near record highs, many traditional investment strategies are shifting towards alternative financial options, particularly among income investors. One popular approach gaining traction is the allocation of capital to covered call funds. A notable performer in this space since its inception in December 2016 is the Amplify CWP Enhanced Dividend Income ETF (DIVO).

Over the past seven years, DIVO has demonstrated reasonable performance, with total returns up by 128.62% since 2016, compared to the S&P 500’s 175.54% growth during the same period. However, recent signals of a potential slowdown in growth, coupled with concerns in consumer spending and overvaluation in the technology sector, have led to a downgrade of DIVO to a sell rating.

With an expense ratio of 0.56%, $3.21 billion in assets under management, and a current yield of 4.61%, DIVO shows allocations of 20.22% to financials, 16.71% to technology, 15.13% to healthcare, and various other sectors. The fund’s top holdings include Visa, UnitedHealth Group, Microsoft, and JPMorgan Chase, collectively making up nearly 20% of the assets.

Despite utilizing a covered call strategy to generate income, DIVO’s exposure to more cyclical sectors like technology, consumer cyclicals, industrials, and financials may not bode well in a slowing economy. With three consecutive quarters of slowed growth rates and rising credit card defaults, concerns over the ETF’s positioning have arisen.

Amidst signals from the Federal Reserve indicating prolonged high rates due to inflation worries, challenges in the tech industry’s high valuations, particularly with companies like Microsoft and NVIDIA, warrant caution. Additionally, the exposure to the Chinese economy and external factors like forex movements add to the complexities faced by large-cap tech companies.

DIVO’s allocation and income generation through out-of-the-money call options may not be sufficient in navigating potential slowdowns. As investors seek better value propositions in the current investment climate, alternative strategies and diversified portfolios may offer more resilience in uncertain times.