COMMENTARY
July has historically been a strong month for the equity markets before seasonal volatility tends to show up in the late Summer and early Fall. While the month got off to a good start, concerns about a slowing economy and softer than expected Q2 earnings started to weigh on investor sentiment. The CBOE Volatility Index (VIX) jumped above 18 at the end of the month, a level not seen since April. Healthy markets don’t go up in a straight line so some level of reaction to the incoming data is welcome. Looking ahead, all eyes will likely remain on the Federal Reserve and incoming economic data to help guide expectations around the economy and overall interest rate policy.
During July, the Amplify CWP Enhanced Dividend Income ETF (DIVO) returned 2.44% while the benchmark, the S&P 500 TR Index, returned 1.22% and the CBOE S&P 500 BuyWrite Index returned 1.13%. The Financials sector (+5.13%) was the biggest contributor to returns followed by Health Care (+4.83%) and Consumer Discretionary (+5.38%).1 Materials (-6.29%) contributed the least to the return during the period followed by Consumer Staples (-0.63%). Positions that contributed most significantly included UnitedHealth (UNH), Goldman Sachs (GS) and Home Depot (HD) while Microsoft (MSFT) and Merck (MK) were among the biggest detractors.
No new positions were added to the Fund during the month, but several existing positions were added to. Amgen (AMGN) and Honeywell (HON) were added during July. The Fund’s position in Cisco (CSCO) was trimmed in June and fully closed in July as it has underperformed against the broader Technology sector, despite being reasonably priced with good free cash flow and an attractive yield.
From an options standpoint calls were sold during the month on Apple (AAPL), Amgen (AMGN), IBM (IBM), Merck (MRK), Procter & Gamble (PG), and Walmart (WMT).
The portfolio held a total of six covered calls2 at the end of July 2024: Apple (AAPL), Amgen (AMGN), IBM (IBM), Merck (MRK), Procter & Gamble (PG), and Walmart (WMT).
At the end of the month, approximately 14.2% 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 61% as of 7/31/24.
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.
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.
All data as of 7/31/2024. 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.