When evaluating covered call exchange-traded funds, a substantial yield often catches the eye, but focusing solely on this figure can be misleading. A more crucial metric is the fund's total return after factoring in the impact of selling upside potential, management expenses, and dividend distributions. Many covered call strategies fall short in this regard because they trade away potential gains for income, especially during prolonged periods of market growth, unlike simpler index funds that retain most of their underlying assets' appreciation.
The landscape of international equities presents an intriguing scenario for this comparison. The Vanguard Total International Stock ETF (VXUS) offers broad exposure to global markets, developed and emerging alike, with a minimal expense ratio of just 0.05%. This makes it a formidable benchmark for any more complex investment approach. However, one international covered call ETF has defied expectations: the Amplify CWP International Enhanced Dividend Income ETF (IDVO). Since its inception in 2022, IDVO has not only delivered an impressive annual distribution of approximately 6.1% but has also outperformed VXUS in total return.
IDVO distinguishes itself through active management, overseen by Capital Wealth Planning. It holds a focused portfolio of 30 to 50 international stocks, carefully selected from the MSCI All Country World Index ex USA. The selection process considers factors such as earnings and cash flow growth, dividend growth, return on equity, market capitalization, and management quality. This active approach allows for strategic adjustments to country and sector allocations to capitalize on emerging opportunities. The fund generates income from two primary sources: dividends from its holdings, targeting 3% to 4%, and options premiums, contributing an additional 2% to 4%. A key aspect of its strategy is the tactical selling of calls on individual stocks, rather than a blanket overwrite of the entire portfolio. This flexibility enables managers to choose which positions to cover and to adjust strike prices and expiration dates, ensuring that positions with high growth potential are not prematurely capped. While IDVO carries a higher expense ratio of 0.65% compared to VXUS, its active management has, to date, successfully offset this cost and delivered superior performance. From September 2022 to September 2026, IDVO achieved a cumulative total return of 116.94%, with distributions reinvested, surpassing VXUS's 96.10% over the same period, indicating that its income generation has not come at the expense of capital appreciation.
The success of IDVO highlights that an income-focused strategy can indeed deliver competitive total returns, challenging the conventional wisdom that high yields inevitably lead to a degradation of principal. For investors prioritizing international equity income, IDVO offers a compelling blend of rigorous stock selection and adaptive covered call strategies, achieving strong results without sacrificing overall growth. This demonstrates that innovative and actively managed approaches can carve out a valuable niche in the investment landscape, offering both robust income and growth potential, and proving that careful management can overcome inherent trade-offs in financial products.
