COMMENTARY
August has typically brought some seasonal weakness and increased volatility in the equity markets, which has been especially true over the last several years and turned out to be true this year too. Within the first several days of the month the CBOE Volatility Index (VIX) reached an intraday high of more than 65, a near historic level that has only been surpassed twice; briefly during the onset of the COVID-19 pandemic and twice during the global financial crisis during 2008-2009. Thankfully, as quickly as volatility jumped and the corresponding equity market selloff arrived, markets found their footing and began to rebound with investors once again looking for cues from the Fed, corporate earnings and incoming economic data.
During August, the Amplify CWP Enhanced Dividend Income ETF (DIVO) returned 3.06% while the benchmark, the S&P 500 TR Index, returned 2.43% and the CBOE S&P 500 BuyWrite Index returned 2.91%. The Financials sector (+5.11%) was the biggest contributor to returns followed by Consumer Staples (+9.17%) and Information Technology (+2.91%).1 Energy (-3.03%) contributed the least to the return during the period followed by Materials (-2.49%). Positions that contributed most significantly included McDonalds (MCD), Walmart (WMT) and CME Group (CME) while Goldman Sachs (GS) and Amgen (AMGN) were among the biggest detractors.
No new positions were added to the Fund during the month, but several existing positions were adjusted. Apple (AAPL) and American Express (AXP) were added to with both companies exhibiting strong cash flow, attractive dividends and sector leadership and August presented an opportunity to increase those positions. The Fund’s position in McDonalds (MCD) was trimmed in August as the restaurant industry has seen a slowdown as consumers reduce spending against higher inflation.
From an options standpoint, new calls were sold during the month on Caterpillar (CAT), CME Group (CME) Duke Energy (DUK), Freeport McMoRan (FCX), Goldman Sachs (GS), Home Depot (HD), JPMorgan Chase (JPM), McDonalds (MCD), Microsoft (MSFT) and TJX Companies (TJX) while several existing call options were rolled into September.
The portfolio held a total of ten covered calls2 at the end of August 2024: Apple (AAPL), CME Group (CME) Duke Energy (DUK), Freeport McMoRan (FCX), Goldman Sachs (GS), Home Depot (HD), JPMorgan Chase (JPM), McDonalds (MCD), Merck (MRK) and Walmart (WMT).
At the end of the month, approximately 17.2% of the portfolio was covered.
Why ROC May Benefit ETFs Using Option Writing Strategies
The return of capital (ROC) can play a beneficial role in ETFs that utilize option writing strategies to generate income. Option premiums received from selling a call (or put) are typically classified as a capital gain to the fund. Unlike interest or dividends, capital gains can be offset with losses. For tax purposes, this can allow the ETF to distribute option premiums as a non-taxable distribution, commonly called ROC. ROC reduces the investor's cost basis, deferring the capital gains tax owed upon selling shares. Option premiums can also provide a measure of downside risk mitigation in volatile market conditions with the option premium received helping offset a decline in portfolio holdings and improving risk-adjusted returns. Option writing strategies offer an attractive after-tax, risk adjusted return for investors seeking income. ROC is 54% as of 8/30/24.
Distribution Rate is computed as the normalized current distribution (annualized) over NAV per share. Distributions have been classified as a return of capital and may be comprised of option premiums, dividends, capital gains, and interest payments. There is no guarantee the ETF will pay a distribution. Click here for Form 19(a)-1 information. 30-Day SEC Yield is a standard yield calculation developed by the Securities and Exchange Commission that allows for fairer comparisons among bond funds. It is based on the most recent month end. This figure reflects the income earned from dividends – excluding option income – during the period after deducting the Fund’s expenses for the period.
Fund inception date: 12/14/2016. DIVO’s gross expense ratio is 0.56%. The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when sold or redeemed, may be worth more or less than their original cost and current performance may be lower or higher than the performance quoted. Short-term performance, in particular, is not a good indication of the fund’s future performance, and an investment should not be made based solely on returns. For performance data current to the most recent month-end please visit AmplifyETFs.com/DIVO. Brokerage commissions will reduce returns. A fund’s NAV is the sum of all its assets less any liabilities, divided by the number of shares outstanding. The closing price or market price is the most recent price at which the fund was traded.
All data as of 8/31/2024. Subject to change at any time. Fund holdings should not be considered recommendations to buy or sell any security. View Current Complete Holdings.
Index Definitions: All indexes are unmanaged and it’s not possible to invest directly in an index. S&P 500 Total Return Index—market-capitalization-weighted index of the 500 largest U.S. publicly traded companies by market value, and assumes distributions are reinvested back into the index. It does not include fees or expenses. CBOE S&P 500 BuyWrite Index (BXM)—tracks the performance of a hypothetical buy-write strategy on the S&P 500 Index. A “buy-write” strategy is generally one in which an investor buys a stock (or basket of stocks), and also writes covered calls that correspond to those holdings.
DIVO differs substantially from the S&P 500 Index and CBOE S&P 500 BuyWrite index, which are used for comparison purposes as widely recognized measures of U.S. stock market performance. While the returns of DIVO have exhibited positive (but varying) correlation to the indexes over time, DIVO may invest in different stocks and in different proportions than in the S&P 500 index and CBOE S&P 500 BuyWrite index.
1All percentages shown indicate total return of the sector for the month.
2A covered call refers to a financial transaction in which the investor selling call options owns an equivalent amount of the underlying security.