DIVO: A Diamond In The Rough On The Equity Value Side

seekingalpha08-02

DIVO is an actively managed ETF focusing on high-quality large-cap companies with a history of dividend growth and a covered call strategy.The fund's simple and transparent approach to portfolio ...

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href=https://seekingalpha.com/article/4709500-divo-actively-managed-etf-low-volatility><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>DIVO is an actively managed ETF focusing on high-quality large-cap companies with a history of dividend growth and a covered call strategy.The fund's simple and transparent approach to portfolio ...</p>\n\n<a href=\"https://seekingalpha.com/article/4709500-divo-actively-managed-etf-low-volatility\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU0640476718.USD","symbol_name":"THREADNEEDLE (LUX) US CONTRARIAN CORE EQ \"AU\" (USD) 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OlgaVolodina/iStock via Getty Images Thesis As we enter the last month before what is baked in as a September 2024 rate cut by the Fed, we are seeing more and more discussions around the 'passing of the baton' from the Magnificent 7 and Technology names to small caps and value equities. A base case scenario where we would get a soft landing and Fed cuts would result in a rotation of capital towards sectors which exhibit low P/E ratios and can benefit from lower risk free rates. This article represents the start of our coverage on this ticker, namely the Amplify CWP Enhanced Dividend Income ETF (NYSEARCA:DIVO): DIVO is an actively managed ETF of high-quality large-cap companies with a history of dividend growth, along with a tactical covered call strategy on individual stocks. DIVO is strategically designed to offer high levels of total return on a risk-adjusted basis. We very much like DIVO's simple and transparent approach to portfolio construction, and its robust long term results and analytics. In this article we are going to outline the fund's portfolio, its strategy and results, and our reason for preferring DIVO at this point in the macro cycle. Simple is better DIVO aims to hold few individual names, roughly 25 per their fact sheet. While the current portfolio is slightly higher at 31 names, the composition aspect is still valid - simpler is better. On the Morningstar stock style map the fund falls in the Large Value box:   Morningstar Box (Morningstar) From a sectoral allocation standpoint, the name is overweight Financials and Healthcare:   Sectors (Fund Website) Financials represent 19.7% of the portfolio, followed by Health Care at 15% and Information Technology at 15%. Its top 10 holding represent more than 50% of the fund:   Top Names (Fund Website) To note, the top names have a roughly equal allocation, with a 4.5% to 6% of portfolio range. What is very particular about this fund is its mandate and active portfolio management via call options. We like non-systematic buy-write portfolios because it allows a fund to take advantage of high volatility names and generate additional income on a tactical basis. The fund's current options positions are:   Options (Fund Website) We can notice that all calls are very short-dated (sub 1 month), and present on six names in the portfolio. We like DIVO for this feature, and believe it is a component which adds to the fund's total returns long term and decreases volatility. Active management has value When done right, active management holds value. Many ETFs today passively follow an index, but DIVO is different. The fund has a very simple portfolio, but follows a prescriptive screening process in order to build it:   Active Management (Fund Website) The fund looks at high-quality large capitalization equities that have proven dividend and earnings growth. Secondly, the fund ensures it takes a balanced, diversified approach among the S&P 500 sectors, thus providing a cross-sectional view of the market. Thirdly, it distills the selected names into a small population of roughly 25 names, with variations at times (currently it holds slightly more names). We like this approach for many reasons, one of which is represented by a focused management team that can dynamically trade slippages in the held names via options. At times individual stocks can get extended, and while passive funds are not able to do anything to monetize that move, funds like DIVO can write covered calls to monetize the implied volatility on extended moves. Analytics  AUM: $3.3 billion. Sharpe Ratio: 0.36 (3Y). Std. Deviation: 13 (3Y). Yield: 4.5%. Premium/Discount to NAV: n/a. Z-Stat: n/a. Leverage Ratio: 0%. Composition: Equities - Large Cap Value  Performance - impressive returns with shallow drawdowns The fund has posted impressive historic returns, very comparable with the behemoth Berkshire Hathaway (BRK.B) and the Schwab US Dividend Equity ETF (SCHD): Data by YCharts DIVO closely tracks the SCHD total return on a 5-year look-back, while presenting a very highly correlated result to BRK.B as well. These are very impressive figures, achieved with a 13.5% standard deviation and 8% annualized volatility. Furthermore, the fund had a low -12% drawdown in 2022 when looking at its price performance (i.e. w/o dividends or option premiums), and ended the year down only -1.5%. We have introduced BRK.B as a comparison point because DIVO's simple construction and methodology reminds us of Berkshire, which has managed to post incredible historic results with very few companies in its portfolio and a robust value and cash flow oriented philosophy. Attractive valuation - robust set-up for capital rotation Unlike tech names, the fund has a very attractive valuation when looking at the portfolio P/E ratio:   Valuations (Morningstar) The name is trading with a 17x P/E and a 2.2x Price to Sales. Capital rotation should take place as the market prices in more Fed cuts, and investors realize the attractiveness of funds with high dividend yields (for equities) like DIVO. The 12-months dividend yield for the name is 4.5%, and we are not using the 30-day SEC yield because the fund makes distributions from its option plays which are not captured via the 30-day yield. As rates move down, investors will again recognize the value provided by a very steady yield, which is comparable with 10-year treasuries from a duration standpoint. Tech names and the S&P 500 are trading with very lofty P/E ratios, generally driven by the Magnificent 7 names. We are of the opinion that in a base case scenario where the Fed cuts, and we get a soft landing, capital will rotate or get deployed towards the corners of the market which are not overpriced, such as DIVO. Conclusion  DIVO is an equities exchange-traded fund. The vehicle falls in the Large Cap Value Morningstar classification, and contains a very simple and transparent portfolio that usually contains 20 to 30 names. The fund is an outlier in the fact that it employs covered calls to take advantage of overextended equity moves at times. The written calls are name-specific. Thus, no basis is present (some funds write index covered calls, thus introducing a single name - index basis). Currently, the written calls are very short-dated (sub 1 month) and cover only six names. DIVO has a very robust historic performance, on par with the much better known SCHD, but more importantly it has a very low volatility profile with a shallow -12% drawdown in 2022 and a year-end total return of -1.5%. We like the fund, its composition and analytics, and are of the belief it will benefit from the ongoing capital rotation and the Fed cutting rates.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2456441149"}