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I have a real case to make for rotating out of covered call ETFs and into a low-volatility, pure-dividend vehicle.
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Savings money growing over time by Nattanan23 via Pixabay Dividend stocks have been too expensive, too volatile, and lagging in a market that has decided it is artificial intelligence or bust. Some high-yield stocks may even be at risk of price plunges due to reducing their dividend payouts. As a result, I haven’t been a fan of dividend stocks for years.
However, I now have a real case to make for rotating out of covered call ETFs (JEPI, DIVO, XYLD) and into a low-volatility, pure-dividend vehicle like the Global X SuperDividend U.S. ETF (DIV). The current market seems to finally have put DIV in the spotlight, not the doghouse.
This is a 13-year-old ETF that aims to own the highest-yielding U.S. stocks, but with a low-volatility overlay in the research process. At nearly $800 million in assets, DIV is a mid-sized ETF, and has been passed many times over by covered call funds. In fact, the JPMorgan Equity Premium Income ETF (JEPI) is about 50 times bigger.
DIV’s portfolio of about 50 stocks trades at only 12.5x trailing 12-month earnings, and it sports a beta (volatility) level that is at the very low end of the equity ETF universe. And, before I skip the best part, how about that dividend yield? 6.3% at a time when the S&P 500 Index ($SPX) yields closer to 1%. That’s some yield premium, making it competitive with U.S. Treasury bonds as a cash flow instrument.
This is a quirky mix, since most S&P 500 stocks do not have yields approaching the level that would make them fit for DIV’s portfolio. Pipeline and other energy transportation stocks are a big part of this ETF’s asset base, with a smattering of consumer stocks, REITs and a heavy dose of MLP energy names.
How Does DIV Compare to JEPI and Other Covered Call ETFs?
The primary drawback of covered call ETFs is upside ceiling risk. Strategies like the Global X S&P 500 Covered Call ETF (XYLD), which writes at-the-money calls on the S&P 500, or JEPI and the Amplify CWP Enhanced Dividend Income ETF (DIVO), which write out-of-the-money calls and equity-linked notes, sacrifice capital appreciation whenever the underlying equities experience a strong rebound.
By contrast, DIV’s pure equity exposure across 50 U.S. stocks with no options overlay means it can participate in market rallies much more directly. And, when market volatility cools down or grinds sideways, option premiums shrink. That forces JEPI and XYLD to generate lower monthly income distributions.
DIV gets that 6%-plus yield directly from corporate balance sheets, cash flows, and dividends. The distribution is backed by earnings rather than option market pricing. In addition, broad-market covered call funds carry heavy implicit exposure to broad indexes, since they tend to be based on the S&P 500, Nasdaq-100 ($IUXX), or other macro indexes.
Covered call funds rely on derivative contracts, equity-linked notes (ELNs), or active management option strikes that can underperform during choppy or V-shaped market moves. By contrast, DIV tracks a transparent, rules-based index of physical equities without option counterparty risk or execution friction.
DIV’s chart looks relatively good to me, especially versus the S&P 500.
Rising rates and an uncertain direction from the Federal Reserve might just be the best news for DIV investors. I also favor running through the component stocks on this ETF’s holdings list, in an attempt to find diamonds in the rough, with strong yields that are stable.
In a market like this, income is not likely to be as stable as usual. Take a look at DIV as a potential differentiator versus covered call ETFs.
Rob Isbitts is a semi-retired CIO, former fiduciary investment advisor, and Barchart columnist. Check out his other work at ETFYourself.com (featuring the Fresh Charts weekly trading post), and ROAR.PiTrade.com, helping investors to better-manage their own portfolios.
On the date of publication, Rob Isbitts did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
Related Symbols
| Symbol | Last | Chg | %Chg |
|---|---|---|---|
| DIV | 19.70 | -0.10 | -0.48% |
| GX Superdividend U.S. ETF | |||
| XYLD | 41.17 | +0.20 | +0.49% |
| GX S&P 500 Covered Call ETF | |||
| JEPI | 57.43 | +0.19 | +0.33% |
| JPM Equity Premium Income ETF | |||
| $SPX | 7,489.72 | +52.09 | +0.70% |
| S&P 500 Index | |||
| $IUXX | 28,274.20 | +167.85 | +0.60% |
| Nasdaq 100 Index | |||
| DIVO | 46.89 | -0.01 | -0.02% |
| Amplify Cwp Enhanced Dividend Income ETF | |||
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