Lead-Lag Live

Income Without Limits: Jonathan Shelon on CLIP, Covered Calls, and Monthly Payouts That Work

• Michael A. Gayed, CFA

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In this episode of Lead-Lag Live, I sit down with Jonathan Shelon, Chief Operating Officer at KraneShares, to unpack how the firm’s CLIP ETF delivers monthly income and international diversification — without giving up growth.

With covered call strategies back in focus, Jonathan explains why China’s tech sector provides more volatility (and therefore more income potential) than traditional U.S. covered call ETFs, and how advisors are blending CLIP with core equity or income portfolios.

In this episode:
– Why CLIP’s monthly distributions stand out from U.S. covered call ETFs
– How volatility can be a benefit, not a risk, for income investors
– The mechanics behind generating 2% monthly payouts
– How CLIP complements both equity and fixed-income allocations
– Why KraneShares sees long-term growth in combining KWEB and CLIP

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SPEAKER_01:

If you look at correlation, which is how things move together, the NASDAQ and the SP are very highly correlated. And what's worse is they tend to be very highly correlated on the way down. And in a covered call strategy, there's still risk. You could still have these drawdowns, and then you have to earn income to chip your way out of it. What you'll find is that in a lot of the US-based strategies, they're earning 1% to 2% a month of option income compared to our 3% to 5%.

SPEAKER_00:

One strategy getting a lot of attention right now is Clip, CraneShares China, Internet covered call ETF. It owns the KWeb exposure and sells calls on top, which has translated into sizable monthly payouts and mid-teens returns so far this year. We'll unpack how it works, what makes it different from U.S. focused income funds, and how advisors are using it in the real world. My guest today is Jonathan Shellon, Chief Operating Officer at Crane Shares. Jonathan, welcome. It's great to have you here.

SPEAKER_01:

Melanie, great to be here.

SPEAKER_00:

Let's start with the origin story. Why did Crane build Clip in the first place? And what problem were you trying to solve for investors?

SPEAKER_01:

Yeah, no, it ties back to the comments you made early on. There's been a lot of interest over the last three to five years and covered call strategies in general. When investors start to worry about volatility or they want to generate income from their equity portfolio, they turn to covered calls. Historically, people had done this on their own. They would buy, say, a particular stock and then sell call options on that stock to generate some income. But more recently, say within the last five years, uh ETFs have cropped up that do this not just on a single stock, but on a full basket. And the popularity started with the S P 500 covered call strategies and the Nasdaq covered call strategies. And when we thought about the space and started researching the space about three years ago, we realized that we had something really unique to offer. In part because our flagship strategy, KWeb, which is a China Internet and e-commerce ETF that we launched about 12 years ago, would generate meaningfully more option income than a lot of the things that have been popularized. So we thought let's see if we can put something together that's really unique in the marketplace that we would love to invest in ourselves.

SPEAKER_00:

Yeah, so most covered call funds crowd around the US megacaps, basically. What are some of the other things that truly differentiate Clip from the underlying market you target? And how do you implement the options overlay?

SPEAKER_01:

Sure. So the the big distinction is that we already have an ETF called K-Web that invests in 30 uh internet and e-commerce stocks. And there are two features that make this different than, say, an S P 500 covered call strategy or a Nasdaq covered call strategy. One, we're investing in companies that are listed on the US stock market, but also on the Hong Kong stock market. Two, the basket is narrower, right? We're not investing in 500 stocks or 100 stocks. KWeb holds about 30 individual securities, which makes it more volatile. And remember, when it comes to covered call strategies, volatility isn't a bad thing. It's a good thing because more volatility means more option income. So what we do is we invest in KWeb and then we write calls or we sell calls on K Web itself, on the ETF itself. And this generates, has generated monthly income somewhere between 3 and 5% on average each month. So that's not 3 to 5% a year, which is how people think about interest rates. This is 3 to 5% of option income each and every month. And then we pay out about 2% of it. So we we make sure that we pay out a meaningful amount and we limit that payout at roughly 2%.

unknown:

Okay.

SPEAKER_00:

So that's what I wanted to ask. How does it translate into the distributions for shareholders over time? Will that change or how is that put sort of set into stone?

SPEAKER_01:

So what we do is we we will pay out the greater of half of what we earn or 2%. And so we've been paying out uh 2%. And uh we think that's valuable for investors for two reasons. One, it's a high distribution rate, right? Roughly 24% per year, but it also leaves potential for upside because those proceeds go right back into the strategy. So it's as if we're doing a little bit of rebalancing on behalf of the investor. Uh we could pay out everything, and I I could tell you when we first launched the fund, we did, but it didn't, it didn't seem to uh allow for this automatic rebalancing feature, which a lot of investors favor. So in a year like this year, you can look month over month over month. We've distributed 2% a year. And not surprisingly, our returns this year, because it's been a good year for K-Web, are up between 18 and 20%. Uh so this is a this is a strong year for this type of strategy. And I should mention, not all covered call strategies have been up 18 to 20 percent this year. Um, from a performance standpoint, the strategy's been quite differentiated.

SPEAKER_00:

So the big picture on portfolio design, does diversification matter? You've you've talked about the the it how how KWeb is it diversified. Does it matter when there is a call strategy on top of it, the way that it does for core assets? And how should people think about spreading risk across um underlying volume of genes and option strikes, for example?

SPEAKER_01:

It's it's a really, really important point because a lot of people think if I own an SP covered call strategy and a Nasdaq covered call strategy, that I'm getting some kind of diversification by doing that. That's not really the case. If you look at correlation, which is how things move together, the NASDAQ and the SP are very highly correlated. And what's worse is they tend to be very highly correlated on the way down. And in a covered call strategy, there's still risk. You could still have these drawdowns, and then you have to earn income to chip your way out of it. Um, what you'll find is that in a lot of the US-based strategies, they're earning, you know, 1% to 2% a month of option income compared to our 3% to 5%. So if they suffer a drawdown, it's going to take them longer to recover in earning that income back. Um, when we have any kind of decline in value, we tend to chip away out of it pretty quickly. Um, so why does why does that matter? Well, if you diversify by combining a US-based strategy with Clip, which is an international covered call strategy, it benefits you in two ways. One, you diversify that drawdown risk we talked about because the stocks we invest in don't go down at the same time as U.S. stocks. They have their own cycle. And two, our distribution rate tends to be twice as high as what you receive for from many of the US-based strategies. So you're diversifying the downside, but you're also diversifying the income stream.

SPEAKER_00:

Yeah, and and so something advisors always ask about is taxes. I want to ask how do you think about tax efficiency with a high distribution strategy like this? And what should clients know about the character of those payouts in terms of taxes?

SPEAKER_01:

Yeah, no, and and taxation is always um, you know, one of these more complicated matters. The way that we think about taxation here is um we've we've tried to structure CLIP to uh have certain characteristics that make it more tax effective. And again, for something to be tax efficient is very difficult, um, unless you're investing in municipal bonds or things that are explicitly protected from taxation. What you can really do in an ETF wrapper and with an income strategy um is to really increase tax efficiency. So we've taken certain steps to achieve that by making sure that for every share of K Web we own, we write one share of call options. And um, to avoid certain treatment, that would be a penalty from a tax standpoint. But by and large, you know, the income that you're gonna receive is gonna be taxable, right? So I just want to be really clear. It's not as if we can somehow um defer magically avoid taxation. You're gonna have to deal with taxes. And in our case, because the distribution rates are high, the tax bill may be higher. Um, but just rest assured that we are taking steps internally in management of the fund to try to avoid some of the penalties that relate to something called mixed straddle. It's probably too much to cover on this call, but um just something to note that because we're investing in the actual ETF, K Web, and writing calls on the ETF, uh, there are certain benefits to doing so.

SPEAKER_00:

Yeah, and I wanted to ask you for, I mean, K-Web is a very popular ETF, but for some of our viewers who may not know a lot about it, could you talk a little bit about what the strategy is there and some of the holdings and and and how you continue to manage or how continues to manage it? Sure.

SPEAKER_01:

So KWeb is um nearly a$10 billion ETF. It's the very first ETF that Crane Shares launched. And Crane Shares is known as a manager that specializes in China and climate investing and alternative investing. And so this was our very first strategy because our founder, John Crane, who as an entrepreneur had actually lived in China for a while, saw all these fantastic mega trends that were occurring there. Uh, urbanization, rapid wealth creation, technological adoption. And when he came back to the States, he said, how do we give investors exposure to these amazing growth opportunities that exist there? And when he looked around, there really wasn't anything like a K Web. So he felt really an obligation as an entrepreneur to bring this to market. So K-Web is really uh investing in the very things that signify growth in China, namely internet and e-commerce names, names like Alibaba, Baidu, Tencent, Tripop.com, Pinduoduo. Some of these are household names to American investors, some are not. But it's a concentrated basket of really the growth leaders in China. And in a year like this year, it's having a very good year. Uh K Web has been up between 35 and 40% year to date. So Clip has benefited from that growth, but also providing an income stream in addition.

SPEAKER_00:

So can you just lastly, uh, before we I ask you a final question, can you just talk about a little bit about how an investor might fit KWeb and Clip into their portfolio amongst other securities or ETFs?

SPEAKER_01:

Sure. So there are a couple of ways that investors are using clip in portfolios. One is, as you mentioned, blending it with K Web. Clip dampens risk, it dampens volatility and creates income. So a lot of our early investors in Clip were actually people that were already familiar with K Web and they said, I'm just going to put these together 50-50. Now I get not just growth, I get growth and income. So that was an interesting way of putting Clip into their equity portfolio, into their equity bucket where they already own K Web. Another thing that we saw as a use case was people that are building income-based portfolios that include not just traditional bonds, but could include high-yield bonds, other sources of credit, maybe even dividend-paying stocks, they'll use covered, they use covered call strategies there. And Clip is very good at increasing the distribution rate. If people are focused on generating a certain amount of monthly income, it's very useful to have Clip in that kind of portfolio. And then I'd say the last use case, and we actually do this in some of the model portfolios we manage, we look at Clip as an alternative investment. So it has low correlation to traditional stocks and bonds. So if you're really trying to diversify an overall portfolio, clip could actually also be in that alternatives bucket, which many investors are increasingly increasing exposure to. So those are really the three ways. Blend it with KWeb, place it inside of an income portfolio, place it inside your alternative sleeve. Um, and it's it's been quite popular, I think partly because of its returns and how well it's done since we launched it about two and a half years ago, but also because the complementary role it plays to the SP and Nasdaq based cover call strategies.

SPEAKER_00:

Yeah, the returns are definitely something that people should go and take a look at. Also, uh Jonathan, finally, for anyone who wants to learn more about Clip or connect with you and the team at Crane Shares, where's the best place for them to go?

SPEAKER_01:

Sure. It's uh craneshares.com. That's K-R-A-N-E shares.com backslash clip K-L-I-P.

SPEAKER_00:

Great. Well, Jonathan, thanks so much for joining me, and thanks to everyone for watching. Be sure to like, share, and subscribe for more episodes of Lead Leg Live.

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Michael A. Gayed, CFA

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