Episode summary
Covered Call ETFs vs. Dividend Growth: Gary Gambino Explains DGRO and DIVO
ETF Spotlight
· · Hosts: Jeffrey Sherman, Bill Sokol, Daniel Snyder · Guests: Gary Gambino
Summary
Gary Gambino argues that covered call ETFs are often a poor trade for investors who care most about total return. He says they usually lag plain index ETFs over time because of higher expense ratios and because capped upside in strong bull markets offsets the income they generate. He notes they can still make sense for retirees or other investors who knowingly want more cash flow and accept the tradeoff.
The conversation then turns to two income-oriented alternatives: DGRO and DIVO. Gambino describes DGRO as a dividend growth index fund built around quality screens, including excluding REITs and the top 10% of yielders, requiring five years of dividend growth, and keeping payout ratios below 70%. He says that makes DGRO more resilient in bear markets, even if it can lag on the upside. DIVO, by contrast, uses covered calls only selectively and on a limited basis, which he says helps it deliver about 4.5% yield versus about 2.5% for DGRO while keeping total returns relatively close.
He also emphasizes that DGRO’s 8 basis point fee reflects passive replication, while DIVO’s 56 basis point expense ratio pays for active portfolio and option management. For younger investors reinvesting dividends, he prefers DGRO; for investors who want income, DIVO can be reasonable. He adds that covered call ETFs are not a hedge, may have mixed tax treatment, and should not be viewed as free yield.
Key takeaways
- Gambino says covered call ETFs usually trail index ETFs on total return because of higher fees and capped upside in bull markets.
- He says DGRO screens for quality by excluding REITs and the top 10% of yielders, requiring five years of dividend growth, and limiting payout ratios below 70%.
- He says DIVO uses selective covered calls rather than overlaying the whole portfolio, which helps keep total returns close to DGRO while lifting yield to about 4.5%.
- He says DGRO’s 8 basis point expense ratio reflects passive indexing, while DIVO’s 56 basis points pay for active stock and options management.
- He says covered call ETFs are not downside hedges; they only get some help from option premium when stocks fall.
- He says investors reinvesting dividends should generally prefer DGRO, while income-seeking investors may accept DIVO’s tradeoff.
Notable quotes
“my focus as a investor is to maximize my uh total return”
“the cover call ETFs tend to generate just a little bit less total return”
“they weed out, um, REITs and the top 10% of yielders”
“they do it um you know in a very uh limited basis so they um selectively sell calls against certain positions”
“if you want if you need the income um DVO is fine”
How the episode opens
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Seek Alpha is not a licensed securities dealer, broker, US investment advisor or investment bank. Welcome back everyone to another episode of ETF Spotlight. I'm Daniel Snder from Seeking Alpha.
Today we are diving into an interesting view on the conversation of covered call ETFs because our Seeking Alpha analyst today is Gary Gambino and he recently wrote an article talking about two different ETFs that are focused on income that he argues might actually be better for investors than covered call ETFs. Now in his article he did mention some of the big ETFs from Neos Investments and and all the love that they've been getting and they've been on this show before. I'm sure you're see you've seen the episode.
if you haven't, go back and watch that one. But Gary, I want to jump into the conversation with you right now. You you have a view on covered call ETFs.
Let's go ahead and get that out of the way and then we can dive into these other two ETFs about income focus that you wrote about. Sure. Well, my focus as a investor is to maximize my uh total return.
And what I've noticed is comparing, you know, the covered call ETFs to just generic um indexed ETFs over time.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- covered call etfs
- dividend growth vs income
- dgro
- divo
- downside protection
Companies and tickers mentioned
- Seeking Alpha
Watch the episode
Watch “Covered Call ETFs vs. Dividend Growth: Gary Gambino Explains DGRO and DIVO” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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