ETF Innovation: Pioneering Income Strategies with Amplify COWS

In an era when the term “innovation” is often tossed around with casual abandon, certain industry leaders such as Christian Magoon truly embody the pioneering spirit it entails. His foray into the realm of exchange-traded funds (ETFs) has been nothing short of revolutionary, as highlighted in Magoon’s recent dialogue with Wealth Advisor Managing Editor Scott Martin.

Amplify ETFs, the firm Magoon founded in 2014, stands as a testament to his ability to venture beyond conventional market offerings, crafting investment vehicles that were previously unimaginable. Amplify has been bringing new types of strategies or market segments to the marketplace of ETFs to address specific investor and advisor concerns. As we’ve navigated through 2023, the investment landscape has been predominantly income-centric, says CEO Magoon, with advisors and investors alike seeking sustainable yield avenues.

Amplify’s approach pivots on the Amplify CWP Enhanced Dividend Income ETF, or DIVO ETF—a high-quality, blue-chip-stock-oriented fund. Its allure lies not just in the dividends but in its dual-income engine, which also allows the fund manager to write tactical covered calls on these blue-chip names. This combination has proven adept at addressing the income predicament many investors face in the current economic climate. Tactical covered calls represent a nuanced approach to yield enhancement.

The art of writing covered calls is delicately balanced within Amplify’s ETF offerings. Magoon explains that while a portfolio may consist of 25 to 30 names, covered calls are judiciously written on a subset of these holdings, optimizing income while managing risk. This selective application of covered calls is a strategic move, distancing the practice from a one-size-fits-all methodology and instead aligning it with market conditions and individual stock performance.

With a combination of dividend and option income, DIVO has been delivering close to 5% returns from blue-chip dividend-paying stocks. Recognizing the global nature of investing, Amplify ETFs also introduced an international version of DIVO, the Amplify International Enhanced Dividend Income ETF, or IDIVO. This ETF follows the same principles as DIVO but focuses on international blue-chip stocks, providing investors with diversified income opportunities across borders.

In addition to their dividend-focused offerings, Amplify ETFs has delved into the world of closed-end funds. Leveraging their expertise in this area, the firm has created an index-based product that selects closed-end funds trading at a discount to their net asset value, presenting opportunities to harness market inefficiencies. This unique approach allows investors to purchase income at a discount, with the ETF tracking the performance of the index—a proposition that’s hard to overlook in any market but especially in one starved for yield. Currently, the ETF offers a distribution rate of more than 11%, providing investors with an attractive income stream.

The prevailing discounts on closed-end funds, as Magoon points out, can be attributed to their retail investor–dominated ownership, which is a stark contrast to the institutionally owned fund landscape. This disconnect between perception and value often results in discount-driven opportunities that Amplify’s ETFs are designed to exploit.

Two of the firm's more recent additions are free cash flow ETFs: the Amplify Cash Flow Dividend Leaders ETF, or COWS, and the Amplify Cash Flow High Income ETF, HCOW. COWS is focused on high free cash flow companies that pay and have historically grown dividends.

HCOW takes the same strategy and adds an options overlay, presenting a compelling SEC yield of 8%. This adjustment is not just an incremental enhancement; it’s a strategic shift toward offering investors a robust income stream combined with the stability of high free cash flow stocks.

In an investment climate brimming with uncertainties, the strategies that Amplify ETFs deploy provide a semblance of stability. Advisors grappling with the challenges of income and yield in volatile markets may find solace in Magoon’s products. The combination of dividend-paying blue-chip stocks and tactically managed covered calls offers a diversified income stream, while the focus on closed-end funds trading at discounts provides a value proposition that is both rare and valuable.

Amplify ETF’s approach underscores the investing fact that innovation is not about mere novelty; it’s about providing practical solutions to prevailing market challenges. As advisors and investors look toward the future, the firm’s strategies and ETFs offer a blueprint for income generation and portfolio stability. The continued evolution of these offerings will likely remain a focal point for those seeking to navigate the complexities of the financial markets.


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