Lead-Lag Live

Unlocking China's Potential Through Covered Calls

• Michael A. Gayed, CFA

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Are you struggling to find meaningful yield in today's unpredictable markets? You're not alone. The investment landscape is evolving rapidly, pushing savvy investors toward innovative solutions that combine income potential with strategic diversification.

In this enlightening conversation with Jonathan Shelon, Chief Operating Officer at KraneShares, we dive deep into the explosive growth of covered call strategies and why international markets offer a particularly compelling opportunity. Shelon reveals how KLIP, KraneShares' international covered call ETF focused on Chinese internet stocks, generates monthly income in the impressive 3-5% range – substantially higher than what most U.S.-based covered call products offer.

What makes this strategy especially powerful is its diversification benefit. With a correlation of just 0.4 between U.S. and Chinese markets, these assets move on completely different cycles, creating a portfolio cushion when you need it most. As Shelon explains, "When US markets experience stress or drawdowns, it happens at a completely different time than when China experiences market stress."

We explore the compelling valuation case for Chinese equities, with tech companies trading at PE ratios in the mid-teens while maintaining strong growth. This stands in stark contrast to U.S. markets trading near historic highs both in index levels and valuations. Most investors remain significantly underweight China at just 2-3% exposure, despite KraneShares recommending 5-10% allocation.

Whether you're seeking to enhance your income strategy, reduce portfolio volatility, or strategically position for a potential shift in global market leadership, this conversation offers practical insights you won't want to miss. Ready to transform your approach to income and international diversification?

Visit kraneshares.com to learn more about KLIP and other innovative investment solutions designed for today's challenging market environment.

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Speaker 1:

What is a covered call strategy?

Speaker 2:

So a covered call strategy is? It just means that you're going to buy a stock. So usually let's say a well-known name Apple, google, what have you? And then you sell a call many times at the money.

Speaker 1:

Take me through sort of why it is that we've seen so much interest in this type of approach.

Speaker 2:

The trend has been pretty crazy, I have to say, and I think it has to do with a lot of things. We talked about the advent of covered calls being a great way to do something in a stock portfolio when you're not certain about the direction and to generate income option income that could be paid out monthly.

Speaker 1:

My name is Michael Guy, a publisher of the Lead Lag Report. Again, this is a sponsor conversation by Craneshares. We're going to talk about one of their products in particular that has held a run and it's actually an interesting strategy in terms of what's behind it. Here we've got Jonathan Schellen. So, jonathan, first time you and I are chatting we've been joking a little bit before going live here, but introduce yourself to the audience to me. We're going live here, but introduce yourself to the audience to me. Who are you? What's your background? What have you done throughout your career? What are you doing at CraneShares?

Speaker 2:

Sure, absolutely, michael. Thanks for having me on and thank you to everyone viewing this who decided to join us here. So a little bit about myself. I'm the chief operating officer at CraneShares and have spent many decades in the investment industry. I've been at Crane for about 10 years as the COO and I do manage some of the ETFs that we have here, and I've spent time at large organizations managing money as well. So I have a lengthy background in finance, in asset management, and I'm really excited to be here today talking to you about covered call strategies and things like.

Speaker 1:

CLIP, all right. So let's get right into it and let's go very bare bones. Basic, first and foremost, because you hear a lot about covered call strategies and obviously there's a tremendous amount of demand for these types of vehicles and employees that overlay. What is a covered call strategy?

Speaker 2:

Sure. So a covered call strategy is something that's not particularly new. It's been around for a long time. It just means that you're going to buy a stock. So usually let's say a well-known name Apple, google, what have you? And then you sell a call many times at the money. So meaning, if Google is trading at X, you're going to sell a call at X and that allows you to generate income by giving up some of that upside. So by selling that call on, say, an Apple stock, you're going to earn some income right away. But if the Apple stock appreciates, you're not going to get that upside because you've given it away in exchange for that premium.

Speaker 2:

So the way I think about it is if you own Apple stock and you decide well, you know what it's in a volatile trading range, it's not going to keep going up the way it used to. Trading range, it's not going to keep going up the way it used to. Covered call strategies are used to do something with that security over a period of time when you think it's just going to be range bound. And so what's happened is, over time, etf firms have been very innovative and said well, you really don't have to do this on your own and you certainly don't have to do it with a single stock. So the early ETFs that built covered call strategies focused on writing calls on the entire S&P 500 or the NASDAQ, and you know we can talk about what that means and what that does to your potential outcomes.

Speaker 1:

Okay. Now, there are nuances to this, because a lot of it also is dependent upon what term you're using. As far as the selling of the option, what strike liquidity of the options themselves in the market? Talk me through some of these interesting characteristics when it comes to putting together an insightful approach.

Speaker 2:

Sure. So if you're writing a covered call option, it is really important to identify over what period of time or what tenor of the option you're going to be selling. In our case, and we'll get more into this we tend to focus on the 30 to 35 day range for writing calls. For the types of options that we write, that tends to be the sweet spot and allows us to generate option income that's in somewhere in the three to 5% range per month, basically. But every investor is a little bit different and you can write a longer call option.

Speaker 2:

Many securities have call options that go out to a full year, but that also means that you're trading upside for a full year in exchange for that income. So that duration or tenor of the option is very important. And the strike price is also really important money, which means you're writing it at pretty much the price where the stock is today. That means you're giving up all of the upside in exchange for more income and if you write an option, that's out of the money. So let's say that if a stock is trading at $100, you write the option at $110, that means that you still have $10 of upside in the stock, but the income that you're going to generate for writing an out-of-the-money option is going to be lower than the income that you would generate from an at-the-money option.

Speaker 1:

So I mentioned there's been a lot of demand for these types of funds that have a cover call overlay to them. Take me through sort of why it is that we've seen so much interest in this type of approach.

Speaker 2:

The trend has been pretty crazy, I have to say. If you look back over the last decade. It's been hyperbolic, particularly post 2020, 2021. And I think it has to do with a lot of things. You know, we talked about the advent of covered calls being a great way to do something in a stock portfolio when you're not certain about the direction, and to generate income option income that could be paid out monthly. So what happened is we saw, over the last few years in particular, the explosion of covered call AUM. So assets under management they're now north of a hundred billion in this derivative income space and there are more than a hundred covered call ETFs that are available. So now, mind you, there are a couple of big players, some leading firms and some leading methodologies, mostly focused on domestic equities, us stocks in particular, and then tech as well. Those tend to be the dominant areas, but there are growing trends in things like single stock covered call ETFs, which is interesting, right, because the advent of ETFs is to create a basket, but there seems to be a trend, in some ways, to go to single stock covered call.

Speaker 2:

Writing, which was really how the strategy was introduced a long time ago. Which was really how the strategy was introduced a long time ago, and then now there's also a trend towards international covered calls, and that's where we excel. I should have mentioned early on that GrainShares as a firm is really focused on China, emerging markets and alternative investing, so we give unique access to strategies around the globe that tend to be quite different than what you would traditionally own in a portfolio. So a lot of individuals own traditional stocks and traditional bonds. Crane Shares is very focused on giving you extended asset categories that tend to have low correlation to things that you may have owned in the past. So CLIP, our international covered call strategy, really symbolizes that very thing. It's very much in line with what we do at Crane and we're excited about it.

Speaker 1:

I don't want to expand on that, but I want to go back to this demand and kind of where it's coming from. I get the sense that certainly among the retail since you mentioned even the single stock side of things a lot of this demand for income comes from concerns around inflation, obviously right, but on top of that, I think, also a distrust of bonds. You know, increasingly you're starting to see more and more wanting to have alternative sources of yields. Yes, right Of bonds, right. So let's talk about that, because that's an interesting sort of dynamic and trend and it doesn't seem like it's over. Even as we're chatting here on May 21st, I mean, yields are again rising.

Speaker 2:

It's really it's such a good point. This trend accelerated after 2022, right, so think about when the Fed started to hike rates again. We saw more appetite, more growth in yield enhancing strategies, and so we believe that the appetite for yields beyond traditional ways of getting exposure to yield a la government bonds, high yield bonds, corporate bonds it's really strong. The appetite is very strong and I'd say it's interesting too, because more and more investors are building.

Speaker 2:

Clients that we engage with are actually building yield-centric portfolios. Right, it used to be that you'd have a 60-40, you'd have your stock and bond mix, but now we run across advisors that are building portfolios that are dedicated to generating income, and those portfolios may have dividend paying stocks, different types of credit, high yield bonds, so forth and so on. Emerging market debt and increasingly, derivative income strategies like covered call strategies are part of that mix. So I think this trend continues. We're seeing it in the asset numbers, we're seeing it in the number of ETFs in the marketplace, and we have a number of examples where we think it's actually pretty smart to mix these strategies together within an income approach.

Speaker 1:

Okay, so let's on the international side. Obviously on the China and international markets, this year in particular, have done quite a bit better than US markets, and you and I both know it's been arguably a horrendous cycle for anything outside of US investing. Most things outside of the US borders have not just underperformed, but underperformed meaningfully. Maybe there's a shift starting. I myself have made the argument many times that I would bet that the next four years China's markets outperform the US markets, and that has nothing to do with Trump and everything to do with starting valuation. Yep, but first let's make the case for international investing and then we'll get into the cover call clip sign if you invested in US stocks alone, you won.

Speaker 2:

You systematically outperformed most equities around the world and if you look at, say, the US markets versus emerging markets, you outperformed by an average of 10% to 11% a year over the last 12 or so years. So for a lot of investors, either because you're new or because you think this is a new paradigm, you are led to believe that US investing or concentrating your equity investments to the US is the superior approach. But what people forget is if you go to the 12-year period before that, starting in the early 2000s and going to around 2011,. 2012, you will have seen the mirror image. You will have seen emerging markets systematically outperforming US equities with a high consistency and an outperformance of around 10% to 11%. So literally the mirror image of what we've seen over the last 11 to 12 years and the tell. The thing that you can look at to help understand how or why this is happening is currencies. In that first 12-year period, the dollar was weakening and had weakened by about 40% cumulatively when international markets were outperforming meaningfully. And in the last 10 to 12 years the dollar has been strengthening to the tune of about call it, three, three and a half percent a year, so 40% cumulatively. But that trend is changing and it's rapidly changing, in part because we believe that Trump is making diversification great again and all the things that worked over the last decade.

Speaker 2:

We're starting to see a shift, a change. Currencies are off eight to 10 percent this year if you look at the dollar on a trade weighted basis. International, therefore, is outperforming meaningfully this year. China is outperforming. Our flagship ETF, k-web, is outperforming the S&P by 15% year to date. Our funds up about 16.5% and the S&P is up about a percent and change maybe flat now if we incorporate today. The S&P is up about a percent change maybe flat now if we incorporate today and the 10-year. Look what's happening with bonds. This is really unusual. So all of a sudden, the things that didn't matter over the last decade, namely diversification, are really starting to matter again and it's forcing everybody to relook at how they're managing their portfolios.

Speaker 1:

Okay, let's talk specifically about China first, around the view from the green share side of things, around tariffs and how negotiations could play out. Again, I've also argued that the irony of tariffs is that it may actually be more beneficial for China than the US because it's going to maybe force some stimulus to get some domestic consumption to pick up, so there's less reliance on the US. But talk us through a little bit around sort of the thesis for China from a longer term perspective and then we're going to bring it to investment ideas. Sure.

Speaker 2:

So, if you think about what's been happening, the Trump administration, with Liberation Day, has brought about tariffs across a number of countries, but was really quite aggressive with China, providing tariffs that were about 145% in the announcements, and then, of course, china was reciprocating and placing tariffs on US goods of upwards of 125% and this was April. Then, a month later, so earlier this month, we had a breakthrough where there was a decision to really work this out and negotiate a 90-day period over a 90-day period, whereby tariffs in this interim period would drop down to 10%. So right now we're in this quiet negotiating period. The market has had a sigh of relief and if you watch even US equity markets in particular, you will have seen that, post that 90-day announcement, the volatility dropped. So it was measured by the VIX. This is the volatility in the US markets, and the US markets started to regain their climb and the US markets started to regain their climb, the trajectory that they were on earlier in the year. So, clearly, amongst all the different things that are happening in the world and all the different treaties and things that are being worked on, the one that was most impactful for the US markets was actually the conversation with China, and this can't be a surprise. The US is the world's largest stock market, the world's largest economy, the world's largest bond market, and China is the world's second largest economy, the world's second largest stock market, the world's second largest bond market.

Speaker 2:

So these two countries are really important on a global scale, as is their relationship, and the crane view is that talking about trade and deficits understates the value of the relationship, and I'll explain why. So we have a traded goods deficit with China that's just under 300 billion, which means that we buy more goods from them than they buy from us, to the tune of about 300 billion. And I think that the actual numbers are we buy about $440 billion worth of stuff from China and they buy 100, I have the number here somewhere. Call it $145 billion worth of goods from us. Now, that doesn't include services. We actually have a service surplus with China. So the number that we have a deficit of is really below $300 billion. It's not terribly huge, and I say that because, consider this U companies in the S&P earn over a trillion dollars of revenue in China. That is not captured in those traded goods or services numbers. In other words, think about companies like Apple and Starbucks and GM and Tesla the top companies in the S&P are making a trillion dollars in China.

Speaker 2:

China is a huge market for them and it's a big part of their growth. So when we sit here and we saber rattle over a couple of hundred billion dollars in trade one way or the other, that really understates the importance of the economic relationship between these two countries, and that's why we believe that cooler heads will prevail. This has been our view for some time. We know that the people that are in charge do understand this from both sides and they want to have a good economic outcome for both countries Because, ironically, the things that we need and the things that China need are quite complementary, and so we can help each other with some of our local challenges, and I'm happy to share more about that.

Speaker 2:

The final point I'd make is that over the last few years, because of some of the geopolitical tensions and just the strength of the Chinese economy, chinese stocks have become super cheap. Pe ratios for China tech are, call it, mid-single digits, so around 15, 12 to 15, depending on how you're looking at it, and then growth remains quite high. So earnings growth in China is quite high. So to your point earlier, michael, the fundamentals are quite compelling in China, whereas in the rest of the market, the equity markets, many of them, including in the US, are near record highs, not just in index levels but also in terms of their fundamentals.

Speaker 1:

Let's talk about ways of accessing China's markets. Obviously, CraneShares is very well known for K-Web. Let's talk about that fund. And then let's talk about how Clip is an interesting spin on it. Sure, absolutely.

Speaker 2:

So the flagship strategy within the CraneShares lineup is called K-Web, k-w-e-b, and this was the first fund that we launched. We launched it back in 2013, and it was designed to capture many of the megatrends that are happening in China. It focuses on China's internet and e-commerce segment.

Speaker 2:

People think about China as a manufacturing country, which of course it is, but China has 1.4 billion people that are very tech savvy and rely on the tech industry to do a lot of consumption. So we may have firms in the US like Amazon that we rely on, and other firms like Google. So, whether it's for shopping, communication, well, china has firms like Alibaba and Tencent. So for many of the US equivalents that we rely on as US consumers, china has their own equivalents that are relied upon by Chinese consumers. So the KWeb ETF bundles 30 of these leading names in the China internet and e-commerce space. So names like Alibaba and Baidu and Tripcom and Tencent and JD and Pinduoduo. So these may not be household names in the US, but they are 100% household names in China, and these are companies that are also at the center of a lot of the innovation that's happening technologically. One of the reasons that K-Web is performing so well this year is because, when DeepSeek was announced, it became very clear that China is very much in the AI race no-transcript.

Speaker 1:

And flows have been remarkable both in and out, as sentiment has waned and gone in favor of China over the years. Yeah, now let's talk about how CLIP plays into it. First of all, obviously you identify correctly that there's this mega trend towards cover call strategies. Most people think about cover call strategies for US funds. This is different.

Speaker 2:

It is. It is. So one of the things that's amazing and what's led to the development of CLIP, is the fact that KWeb has an extraordinary options market that has developed around it. So when you launch an ETF, many times, once the ETF grows to scale say billions of dollars in assets and has a wide following, like KWeb does an options market will develop. So you'll start to see call options and put options and different tenors and so on, and that's really exciting because if you're an ETF issuer, like we are, you then have additional tools to build custom strategies.

Speaker 2:

And so what we realized in studying the covered call space and we did this for about a year before we launched Clip back in 2023, we started to realize that there really weren't any covered calls that were focused on a basket of securities outside of the US. The other thing I should mention is that we also realized that by creating a covered call strategy around K-Web, our flagship ETF, by using those very options that I spoke about, that we should be able to generate higher levels of option income than some of the flagship strategies that we see based on the S&P or the NASDAQ, and that's because K-WeB tends to be more volatile. Kweb is a more concentrated basket of stocks, and those stocks tend to be more volatile in and of themselves. So what happens is, when you write call options on a more volatile basket, you generate higher levels of option income, and so the option income that we've been able to generate and clip over the last two years that we've been managing it has been somewhere in the three to 5% per month range, which is really attractive.

Speaker 1:

I've got to assume you have to sort of wait for a certain moment in time to really think about launching a strategy like this, meaning you've got to have the liquidity, you've got to have the options market being deep when it comes to $7 billion range.

Speaker 2:

So the notional value of options traded in or owned in KWeb are roughly the same size as the ETF itself. That's really significant and that may not help. But think about it in a relative way. Across all 4,000 plus ETFs that are out there, kweb is the 14th most optionable ETF. So it's in that top universe of ETFs with option liquidity. Think about things like the S&P and the NASDAQ and so forth and so on. So if you're familiar with SPY or QQQ and those of course are leading optionable ETFs but KWeb is among those top most liquid optionable ETFs, which means that it has a really wide following, not just by individual investors and wealth managers, but also institutional investors, hedge funds and foundations, endowments, family offices really the full spectrum of investor types are able to gain exposure to K-Web either directly through the ETF or through the options market.

Speaker 1:

How steady is the yield when it comes to cover call strategies? Meaning does it vary? How meaning does it vary? How much does it vary? How should one think about that? Because it's not really a fixed income, obviously.

Speaker 2:

instrument it's not, and so, unlike, say, a fixed income instrument where the yield that you generate is entirely driven by what happens to the yield curve, with covered call strategies there's almost a linear relationship between something called implied volatility and then the option income that you're able to generate. In other words, when implied volatility is high, then option income goes up. When implied volatility goes down, then option income goes down. A good way, if folks listening in are familiar with the VIX, the VIX is the implied volatility for the S&P 500. That's what the VIX actually is. So as the VIX is moving up and down, the amount of income you could generate from the S&P is also moving up and down linearly. So you could think about it that way, right? So when the VIX goes from, say, a level of 15 to 30, then you would expect being able to earn twice as much on your covered call options in an S&P product.

Speaker 2:

The same thing holds for KWeb, or Clip rather, that writes covered calls on KWeb, and we've seen this episodically We'll see volatility spike, and that gives us better opportunities. Just in the month of April, we saw volatility spiking because of some of the tariffs announcements and some of the rhetoric, and we were able to write options for the month of April at a level of about 6% for the month, which is more attractive than our long-term numbers, which tend to be somewhere in the 4%, 3.5% to 4% range. So that's actually an interesting dynamic right, when volatility spikes, meaning there's something happening in the markets, you actually have the ability to generate slightly higher yields, or I shouldn't say yields, but slightly higher option income. Now, that said, those periods of heightened volatility tend to also be associated with depressed returns, so the two things tend to balance each other out.

Speaker 1:

Is it an either or type of situation, meaning if you're going to position to China using a China fund to be in clip or K-Web, or is there something maybe to blending the two in some way shape or form?

Speaker 2:

It's a really, really great point. Michael and our early adopters of Clip were actually investors that like to combine K-Web with Clip. And let me explain why. If you own K-Web by itself, you're making a bet on China, and it's an aggressive bet because you want to benefit fully from the performance of these companies, their earnings potential, their inexpensive valuations and the lack of love that China has gotten over the last couple of years. So the underweights that many investors, including institutional investors, have have.

Speaker 2:

What CLIP does is CLIP reduces volatility. It dampens some of that by trading the upside in exchange for a relatively high level of monthly option income. So the volatility of CLIP tends to be about half, has been about half that of KWeb, and therefore the drawdowns that Clip has experienced have tended to be brief and much more shallow than the drawdowns of KWeb. So many of our early investors said this is pretty cool. I could still make my bet on China by investing in KWeb, but I can also layer in Clip at some level 20, 30, 50% bring down my volatility and then also get monthly income. So that's pretty interesting.

Speaker 2:

Now I will mention that in Clip we cap the monthly income at 2%. So even though we're earning between 4% and 5%. We put a cap on it at 2%. That's very much in line with what a lot of folks do in the marketplace. Some put a 1% cap in. So we tend to pay out 2x monthly income to what a lot of the flagship covered call strategies do in the marketplace that are focused on the US. And the reason it's 2x is because we tend to generate twice as much option income. But we do cap it at that level because we want to hold back some of that option income to create that buffer, reinvest it back into K-Web and create that upside opportunity as well.

Speaker 1:

Take me through some scenario analysis. So, uptrending market for China, how does Clip do? What should one think about in terms of yield potential? Again understanding there's a volatility aspect obviously to this Sure. Absolutely Sideways markets, down market, what's sort of more ideal Sure?

Speaker 2:

sure. So in a bullish market environment where, let's say, k-web is up 50% to 100% and this is true, right, there have been environments over the last 12 or so years where K-Web has had very strong performance years, certainly even rolling 12 to 24 month periods, where K-Web's up 50 to 100%, in a bullish market like that, clip is not going to keep up with K-Web. Right, you are necessarily selling back, writing those covered calls and giving up some of that upside. But those are the types of years that you're earning, you know, 20 plus percent returns. You're earning the income that's being paid out every month. That 2% is translating into returns because you have few or invariant drawdowns that don't reduce your returns. So that's a decent outcome In a bear market environment which, by the way, is something similar to what we've had for the last couple of years.

Speaker 2:

Since we've launched Clip, clip's total returns have been right around 8% to 9%. That's what we've achieved annualized. So when you've had a lot of downside volatility achieved annualized. So when you've had a lot of downside volatility, that's the type of return that we've produced. And we've had pretty significant drawdowns over the last couple of years with K-Web. So that's another scenario.

Speaker 2:

And then there's something in between, something between the bull case, which is close to what we're paying out, and the bear case, which is something similar what we're paying out and the bear case, which is something similar to what we've experienced over the last couple of years. But I think that the point to make here is that CLIP is just less volatile. That option income produces a cushion on the downside and really allows people to tailor a portfolio. Just think about that 50-50 example. If you go 50% K-Web, 50% CLIB, you now have 1% option income that's being paid out every month. That's creating an attractive distributed income for you but at the same time, giving you opportunity to benefit from what could be a very different market environment over the next five years than the one we've seen over the last five.

Speaker 1:

I'm sure you talked to a lot of asset allocators and financial advisors. What do you typically hear or see in terms of how much of a portfolio goes into China broadly, and then maybe more specifically, something like clip Sure, absolutely.

Speaker 2:

It's really the fundamental question right. We get this all the time, people that accept that you have to own China and, by the way, we recommend owning China as a separate asset class. If you think about the market opportunity, emerging markets represent about 15% to 20% of the investable opportunity globally and we think between 40% and 50% of that should be in China. So our recommendation is that within your equity portfolio, you should have 5% to 10% of it dedicated to China, not getting it through your emerging markets bucket. But we think a better way to build out that portfolio is to invest in emerging markets, ex-china and then having your China sleep. Be explicit have it be a standalone and use strategies like K-Web and KBA to build it out. Now, if you're just going to do it in a thematic way in other words, rather than owning core China, which tends to be heavily represented by not just names like in K-Web, but also a lot of the mainland Chinese names they're called the A-shares If you're going to do it just with thematic approaches, we have a lot of ETFs at GrainShares that you can put together to build it out. So, not just China Internet. We have China Healthcare, china Cleantech and many, many more. We actually have over 30 ETFs listed in US exchanges and also some around the world.

Speaker 2:

But, to answer your specific question, if you're going to go one layer down, so if you're going to then take your China exposure, put about half of that into KWEP, so take, call it 5% KWEP, so take, call it 5% in K-Web.

Speaker 2:

You can then decide do I want to split that up, depending on my risk capacity, between K-Web and Clip? So maybe 2.5%, maybe as high as 5% in Clip, but those are the types of numbers that we would expect within an equity portfolio, unless you have a much stronger view. You want to take a directional bet, you want to benefit from some of the changes from history, but those are kind of the levels that we're seeing or think are appropriate. What I will tell you, michael, is that many clients right now have very little invested in China, some as little as 2% or 3%, even knowing that the number should be closer to 5% or 10%. And that's worked, admittedly, for the last couple of years. If you underweighted China, your performance was good. That is not the case over the last, certainly not this year and not even over the last 12 months. So investors are starting to understand this dynamic and starting to understand that what was a source of outperformance isn't anymore and can actually hurt your portfolio, and we're starting to see investors closing those underweights.

Speaker 1:

You used the word investor Between K-Web and Clip. Are there more investors in Clip and more traders in K-Web, just given the nature of the yield and the volatility, at least on the downside, being pushed into your point about that options income.

Speaker 2:

It's an excellent observation. It really is. Because K-Web is so large and has so much liquidity, we do see traders, including well-known hedge funds, at times taking meaningful stakes in K-Web and trading in and out of it. So we expect that to happen. Just because K-Web is a multi-billion dollar ETF, it has tremendous liquidity and it has an options market that you can tack on with it. So if you're a very sophisticated hedge fund or a sophisticated institutional investor, you could really tailor your bets fund or a sophisticated institutional investor, you could really tailor your bets, which lends itself to shorter time horizons.

Speaker 2:

Clip, as we discussed, is more in the less volatile, more income producing space and therefore we would expect investors in CLIP to hold onto it longer.

Speaker 2:

So many of the clients we speak with about clip are in the wealth management space their financial advisors, um, and increasingly some institutions just given the attractive option, income characteristics, um, but investors that are not looking to trade in and out of it because, quite frankly, it takes a lot of the, the risk out of the equation. But at the same time this is something that I should have mentioned right away K-Web, when it has a drawdown, when it has market stress, it happens at a completely different time usually than when the US experiences market stress or drawdowns. So much like blending US stocks and international stocks helps with diversification. Blending CLIP with US-based strategies also helps with diversification and that's a really important point. The very things that we're used to dealing with for stock strategies also apply to covered call strategies. You could blend an international covered call strategy like Clip with your US-based covered call strategy and achieve superior outcomes. So we think that's really important to emphasize here, and one of the advents of a strategy like Clip how should we think about diversifying against other cover call strategies?

Speaker 1:

Is it the same sort of thought process as while you're diversifying China with the US, or are you looking at it from the standpoint of the yield and volatility dynamics are different for a clip versus on a cover call on US markets.

Speaker 2:

Yeah, so correlations translate over. So, just like US stocks and China stocks have low correlation something around 0.4, which is really quite low. Just to put that into context, if you think of US stocks, us large cap stocks and US small cap stocks they have a correlation that's probably close to 0.9. So the closer you are to one, the more you are moving in tandem and sync. So 0.9 is quite high.

Speaker 2:

If you think about US stocks and global stocks outside the US, the correlations are like 0.8, so a little bit lower. And if you compare US stocks with China stocks, the correlations drop all the way down to 0.4, which tells you that the returns are on a different cycle and that's because the economies are on a different cycle and the markets are quite different, so forth and so on. So you should really think about the ability to reduce risk as being quite strong combining US and China stocks, us and China covered calls. But the other added benefit my opinion is that some international covered call strategies like CLIP do have that higher option income opportunity because they do tend to be more volatile. Just like international stocks tend to be a bit more volatile than US stocks, international covered call strategies like Clip are more volatile than US covered call strategies, but you're compensated for that through higher option income.

Speaker 1:

What's the pushback? I like the idea. I think it makes sense in general right to have a cover call, especially on a market like China, and the yield is attractive and a lot of benefits there.

Speaker 2:

But what pushback do you typically hear? Associate the China covered call strategy with China not recognizing that you are changing the characteristics of the strategy by writing options. So it's really sentiment and I think it has to do more with a backward looking view on it as opposed to a forward look Look. The other side of it, I guess, would be it is more volatile than a US-based strategy. So if you are not interested in the higher option income that comes with it, then maybe the international version is not for you and you're okay having something that's in the 1% a month range in terms of option income. But I think, given the correlation benefits, the option income benefits, there really aren't many pushbacks that we've encountered.

Speaker 1:

Jonathan. For those who want to learn more about Clip, talk about where they can get some information and also maybe just talk briefly about some of the other products that Craneshares offers. Sure.

Speaker 2:

Absolutely. So everything we've talked about because these are ETFs they're all available at wwwcranesharescom that's CraneShares with a K, and I should also mention that a great resource for people that want to learn more about China or stay up to date on China is to visit our daily blog that's written by our CIO, brennan Ahern, and that's at wwwchinalastnightcom. So this gives you more high-frequency information about performance earnings. Right now, we're in earnings season and there's a lot of information that's being presented around China, but I would emphasize that we are a specialist in the China space and we emphasize thematic investing.

Speaker 2:

So our goal is to help our clients build better portfolios, and we don't necessarily think you need to just do the basic thing. We think that there are ways to combine many of our ETFs whether they're in the China segment or in the climate segment or even some of the things that we do with liquid alternatives to just build more durable strategies. And this has been a hard message to provide over the last 10 years, where all you really had to do is invest in the S&P 500, maybe some high yield bonds, and you look like a genius. Well, when markets are cooperating, everybody looks like a genius. We're now entering into a stage where having discerning ideas and discerning views on markets are really important, which is where, michael, I think the content that you produce and the information that you provide is extraordinarily valuable.

Speaker 1:

And I certainly appreciate that Everybody that watches. Please learn more about Clip at the Crenshaw's website. I think it's very educational, very interesting. And also check out the Craneshares Substack at cranesharessubstackcom. Some good content there as well. Jonathan, I appreciate the time here and have a long weekend here. All right you as well. Take care, mike. Cheers everybody Over and out, bye-bye.

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Michael A. Gayed, CFA

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