Bonds have been a helpful diversifier in investment portfolios for more than 40 years, largely due to a consistent decline in interest rates. When rates go down, existing bonds become more appealing because their fixed coupon payments stand out against newly issued options. Over time, this has benefited bond investors significantly.
For decades, those who used a classic 60/40 mix of stocks and bonds have seen great results. During downturns, like the 2008 financial crisis and the 2020 COVID-19 market plunge, central banks reacted with swift interest rate cuts. This bolstered bond performance, providing stability when it was most needed.
However, there have always been some underlying issues. A traditional 60/40 allocation might seem balanced at first glance, but in terms of risk, it often isn’t. A substantial majority—often around 90%—of the volatility in such a portfolio stems from stocks. While bonds can help smooth some of that out, they don’t balance the portfolio’s risks equally. This became glaringly obvious in 2022 when rising inflation and interest rates led to losses in both stocks and bonds. The longstanding inverse relationship that investors relied on became unreliable.
If your primary aim is to generate retirement income that aligns with something like the 4% withdrawal rule, you might want to explore a covered call strategy. But it’s worth noting that I’m not a fan of passive covered call ETFs that consistently sell 100% of their assets in at-the-money calls each month. These approaches often leave a lot on the table regarding potential gains.
Active management is essential, particularly with something like covered calls. One option I find intriguing is the Amplify CWP Dividend Income ETF (NYSEARCA: DIVO). Let’s dive into why I think it stands out.
What is DIVO?
DIVO’s stock portfolio is relatively concentrated, featuring around 20-25 high-quality companies. It starts with a focus on firms known for strong dividend and earnings growth. From this point, managers allocate investments across all 11 sectors of the S&P 500, adjusting based on the broader economic picture.
The resulting portfolio construction emphasizes factors like market cap, operational performance, consistent earnings, free cash flow, and return on equity. As of March 31, financials claimed the largest sector at roughly 25%, followed by industrials and technology, each around 15%, and consumer sectors at about 14%.
DIVO employs a covered call overlay, but it’s worth noting that it doesn’t just write calls on major indexes like the S&P 500 or Nasdaq-100. Instead, the strategy selectively sells covered calls on individual stocks and adjusts aspects like strike prices and coverage ratios based on market conditions and judgement from the management. This means DIVO is more likely to maintain long-term capital appreciation compared to many passive covered call ETFs.
The trade-off with this strategy is that DIVO offers lower yields than some of the high-income covered call products currently available. As of April 30, DIVO’s annualized distribution rate was 4.75%, which still exceeds the often-discussed 4% withdrawal rule for retirement. The ETF carries an expense ratio of 0.56%, which isn’t as low as typical index ETFs, but is fairly reasonable within actively managed covered call strategies.
How is DIVO’s performance?
DIVO has benefited from sub-advising by capital wealth planning and managers like Kevin Simpson, who has a recognizable presence through media appearances. This approach has proven effective so far. As of March 30, 2026, DIVO holds a prestigious 5-star rating from Morningstar, ranking among the best in the Derivatives Income peer category based on risk-adjusted returns.
However, on a total return basis, DIVO slightly lags behind the market overall. In the last five years, it has seen an annualized return of 11.4%, compared to the S&P 500’s 13.14%. Yet, I think this comparison misses a crucial point. For retirees, one of the key advantages of DIVO lies in behavioral factors.
Many retirees feel uneasy about selling stocks to cover their expenses, even if doing so could yield better financial outcomes through appreciation. DIVO addresses this psychological barrier by providing consistent cash flow directly to its investors.
Moreover, it does so while delivering strong risk-adjusted performance. Data from Testfolio.io covering roughly 9.43 years shows DIVO achieving a Sharpe Ratio of 0.70, while a conventional Vanguard 60/40 portfolio realized a Sharpe Ratio of 0.65 in the same timeframe.
This doesn’t imply that DIVO should entirely replace bonds in retirement portfolios. However, for retirees looking to substitute a portion of their fixed income allocation with a more income-focused equity strategy, DIVO seems to make a compelling argument.
