Lead-Lag Live

China Q3 Update & the KLIP Covered Call Strategy with Henry Greene From KraneShares

• Michael A. Gayed, CFA

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In this episode of Lead-Lag Live, Michael Gayed talks with Henry Greene from KraneShares about how recent changes in US–China trade incentives are improving the outlook for China’s tech sector and why it matters for investors.

They discuss the rise of AI in China — including DeepSeek and Alibaba’s Qwen models — and how letting companies train AI on their own data could boost cloud adoption. Henry also explains China’s push into robotics and how it fits alongside US leadership in chips and software.

To bring it back to portfolios, Henry breaks down why KWEB tends to react strongly to policy headlines, how KLIP uses that volatility to generate monthly income, and simple ways to combine the two depending on your goals.

In this episode:
• What’s changing in US–China trade
• China’s growing AI ecosystem
• Why enterprise fine-tuning matters
• How robotics and chips fit into the story
• How KWEB behaves during policy shifts
• How KLIP turns volatility into income

Lead-Lag Live brings you real conversations with the people shaping global markets. Subscribe for more insights that cut through the noise.

#KWEB #KLIP #ChinaTech #AIinChina #EmergingMarkets #Investing #KraneShares #MarketInsights

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SPEAKER_00:

As I always say during these webinars, if you are an advisor and you're in an office, do me a favor, tell other fellow advisors that this webinar is taking place. Uh hopefully we'll get a good crowd here. It's gonna be interesting conversation around China and how to think about next year and what we've seen this year. Uh for those that are here or for the CE credits, I will email you afterwards to get your information to submit that to the CFP board. Just stick to the end of the presentation. If you have any questions, folks, during this webinar, uh just put in the QA. We'll try and bring it up towards the end here. And uh hopefully all of you will enjoy this. So, with all that said, my name is Michael Gayed. Uh, this webinar is sponsored by Crane Shares. This is Mr. Henry Green, uh, who uh I think is uh uh gonna teach you guys a lot about China here. So I'll hand it to Henry and uh looking forward to this conversation.

SPEAKER_01:

Hi, thank you for joining us. As Michael said, uh Henry Green, I'm a senior strategist here at Crane Shares. Um, and it's uh my pleasure to be presenting to you today. Today, uh, what I want to do, uh, you know, what Michael and I talked about doing is to give a quick update about some of the interesting developments we're seeing in China um as of this uh latest quarter, um, and then getting into our very unique uh covered call strategy, which uses our flagship K Web China Internet ETF as the underline. So just a quick introduction to Crane Shares, in case you're not familiar with us. Um, our founder and CEO, Jonathan Crane, uh started and sold a successful media entertainment business in China in the early 2000s, came back to the United States, saw that um what people were investing in when it came to China was not where the growth was. He said people need more exposure to technology. He said technology is going to be number one in China. Growth stocks are gonna be the most important theme. And so he said, why don't we create exchange-traded products to capture uh these themes? Fast forward to today, we are a much larger firm with a much larger suite of products, mostly ETFs, um, capturing broader emerging markets, alternatives, um, as well as carbon credits. China in Q3. All right. So what happened recently? We had Trump and Xi. They finally met. Now, for a while, uh, it was a little bit uncertain whether or not the meeting was actually going to take place. We had Trump, I think when he came into office initially, he said, um, oh, it'll be within the first 100 days. Um, and then that kept getting pushed back and pushed back and pushed back. Um, and then obviously you had the Liberation Day tariffs um claiming very, very high, the highest we'd ever seen, claiming that you know, those would be the tariffs will be reciprocal, we put on China. Um obviously this caused a great deal of volatility in markets. Um fast forward today, um, we had uh kind of ratcheting up in pressure right before this meeting, which is kind of expected. That's Trump's style. Um and then uh we had this meeting, which resulted in a lowering of tariffs. Um, there are many tariffs, but overall it's down to about 10% on China, um, and about vice versa, either way you go. Uh and also uh an understanding around rare earths where China's issuing uh export licenses for rare earths in the United States. And then in reciprocation, the United States will allow more chips to go into China. Now, this is our temporary. Uh this original agreement, this preliminary agreement is supposed to last for a year. Um, so but we we we think that this is the start of something uh really fundamental, really, really good for the US-China relationship, something that we've been waiting on for a long time, I would argue, since uh 2016, 2017, when Trump kicked off the trade war with China. Um so that's a really this is a really good thing for the world and the world economy. And and we don't think that it's actually been correctly priced in yet um by Barkett's. So we think there's more upside from uh these trade deal. Um people say it was underwhelming. Um we actually think um that given that this is the best development that we've had um in the past, you know, seven, eight years. So um, and then we so China really came on the scene this year uh in terms of AI technology. Um no one really thought that China could innovate in this space uh like we do here in the United States. That uh pre-conception was um, in our opinion, um completely uh destroyed uh by the release of Deep Seek uh in China, a large language model that was shown to perform just as well, if not better, than ChatGPT in the United States. Um so we've seen this theme continue to cause a re-rating in China technology, um, which uh has been very positive for the markets we invest in, especially K Web. Now, uh there are some very key and very interesting differences now that we are seeing emerge. And I think we saw emerge, especially uh this year in this past quarter, even, uh, between uh China and the United States when it comes to artificial intelligence technology. Um and with that also robotics um has become a key theme. And and so these are the the so what are they? I I mean so number one is the models themselves that are being released, the large language models being released in China, are mostly open source. Okay, and that's very different from here in the United States. We prefer closed loop, these private LLMs where you know if you want to use it, you have to pay a licensing fee. Um, and then even that, you don't control your own data when you're using, whether you're using Grok, we use Grok uh or you're using um ChatGPT or what have you, whatever model you're using, usually have to sign over that data to that model. Whereas in China, they're mostly open source, where you can say, okay, I can take take the model uh from Alibaba's QN or take the model from Deep Seek and actually just use, just take that model and make it my own and use it for my own purposes. So that's a really key difference. And that so the monetization in China is coming from the cloud more than selling LMs. Okay, difference number two is um who's leading the charge in AI development. It's in China, it's actually mostly the largest publicly traded internet companies. Okay. This is a key difference as well, right? Alibaba's QN is uh the number one, uh maybe number two, uh most used large language model. It's one of the most popular. Um, and it's run by Alibaba, which is a key holding in K Web and a publicly traded stock, right? In the US, it's mostly led by private companies. Uh, OpenAI, of course, being the best example. Um, and then on uh robotics, right, which is kind of now this new offshoot we've seen of the artificial intelligence industry. China, uh, they're really good at making the hardware for this. They've come a long way in this, as you see on the screen here to my right. This is actually our team went to Beijing earlier this year uh and uh was getting coffee served to them by a robot, uh right in the middle of Beijing. Okay, this is not happening here in the United States. But what is happening here in the US that we do very well is the we have we do still have the cutting edge in terms of um the chips uh that are going to be used to actually um control uh some you know the actual robotics um physical infrastructure, right? So quote unquote the brain, right? That's something that we do very well here. So we see the future of robotics as being perhaps Chinese technology and and in the US, um, certainly uh US-made software. Um and obviously that can help with security concerns, um, et cetera. And then finally, of course, um, you know, the multiple in China is much lower. K Web, we see a P of 18 compared to something like Nvidia, which is trades at 58 times earnings, right? So we still think there's room to go, um, even though uh, as we can see here, right, K Web, uh representative of the China Internet space, has done very well um so far this year. So this is this is from the end of 2023. So just showing you kind of how K Web has reacted to different events. Um KWeb done's very well, but it's still the average multiple is still a lot lower, um, 30, 40, 50% lower uh than you know, take any average, whether it's NASDAQ 100 or or um one of the internet indexes in the United States, you're gonna usually find a lower multiple multiple in China. That's still the case, despite this strong performance. Okay. So um dovetailing into our conversation, what I'd like to speak about, our product that I'd like to bring up today, um, which is Clip, which is um selling covered calls on K-Web. Um, so if you look at K-Web here, right, you see that it's very reactive to these kind of global um policy and economic events. So China Stimulus is a classic example. Last year in September, they announced unprecedented measures, multiple ministries announcing huge measures to stabilize the stock market, buy stocks. Um, this is akin to, you know, we had the China's national team, which are investment funds associated with sovereign wealth buying stocks, which we related to, you know, something a Japanese central bank has been doing for a long time, which is buying stocks. So anyway, that caused a huge surge um in K Web, uh, which was followed by uh obviously markets got over exuberant and came back out. And then it hit another kind of low point in Liberation Day with the tariff announcements, right? But then when we realized that a lot of those were going to be uh exempted, um, that you know they were gonna kind of kick the can down the road on those, you know, with hopes that there would be some kind of deal, we saw markets come back leading up to, you know, around today, I think this chart is as 5th, uh, where we have a meeting between Trump and President C. Um, so K-Web, I think there's two things to remember about K Web. Number one, it represents what we think is the cutting edge of technology, uh especially artificial intelligence in China, insofar as you can access it within the public markets, but it's actually very accessible in the public markets through K Web. Um and number two, uh even though, and again, even though the fundamentals of these companies, Ali Baba Vaidu, are not really affected by these big geopolitical and trade events, nonetheless, K Web is very much affected by these geopolitical and trade events, making it very volatile. Okay. And a volatile, uh relatively representative of uh a dynamic market, uh investment is apt for a covered call strategy. Okay. So for those of you who are not familiar with a covered call strategy, right? Um basically you're taking advantage of the volatility in the underlying, whether it's a stock or an index or an ETF. In this case, it's an ETF, you're taking advantage of that volatility by just kind of selling calls, uh, basically, literally selling calls at the money and taking that premium for people who want to buy uh those calls. Um, and obviously you're selling that call, you're not selling a naked call, you're selling what's called a covered call because you own the underlying. So we actually own K Web within Clip and then sell calls that are covered, covered, hence covered calls, by our uh uh holdings in K Web. Um so I would imagine that a lot of you are familiar with covered call ETFs. They've become actually quite popular in recent years in the United States. Um, you know, this is just so this is we're showing uh just basically growth in options-based ETFs, many of which are covered calls, though not all of them are. Um, right. So there are now over 200 available. I mean, that's probably it's probably 300 now. I mean, these things kind of it seems like there's a new one that comes out every day. Um, you know, and then then the assets have grown to about$30 billion in covered call ETFs. Um, and it's just it's it's quite amazing. I I like to uh mention to people, um, so a lot of people don't know this, there are actually now more ETFs than stocks um listed in the United States, right? Which is a pretty incredible statistic. And I think a lot of that is from these options-based strategies because these include things like single stock levered ETFs, right? Uh of which we we do have a handful. Um and of course cover calls being a large category. Um so why are we able to do this? And why are and more more uh more uh saliently, why are we able to do this so efficiently? Okay. Uh the reason is K Web is is is just a liquidity machine, okay? K Web is the second has the second largest options market, so that's the sum of puts and calls, the notional value, um, the second largest in China ETFs, fourth in emerging markets, third in what what we define as thematics, um, and then 13th as of when this data was taken, which was on October 13th, 13th uh in the US out of all USS ETFs. So that means you're there's always a market for these these calls, right? And it's it makes it very it makes strategy very efficient um uh and makes it very liquid. Um clip itself is very liquid, the calls are very liquid, right? So that just kind of creates this very good environment to launch a cover call strategy um on K Web. So just go, just breaking down really quickly um uh for the dynamics of what's actually going on here, right? And how to how to think about it. Um so with K-Web, again, you know, I showed the chart earlier, you're getting uncertain downside and uncertain upside, right? Just like any stock. Um, you know, uh with K Web can see pretty significant drawdowns that we've seen over the over the past few years, right? So that downside is significant. More significant than if you're investing in the US, okay. And but the upside is also significant, right? People say no risk, no reward. Um, you know, so there's also an incredible upside and a good story to tell. And like I said, the valuations are low, so K Web could continue to just go on up. Um so with Clip, you're basically exchanging the uncertain downside and uncertain upside by writing a call for option income and uncertain downside. Okay, so you're basically exchanging the upside of K Web um for a monthly income stream um that is relatively attractive. And we'll get into that in a minute. So I implied this uh a little bit uh just before, but uh K Web is is uh a great deal more volatile than um major US equity indexes. So here we're looking at NASDAQ 100, Russell 2000, SP 500. Um NASDAQ 100 and Russell 2000 are right neck and neck in terms of all. Um and then K Web, you just see kind of blows them out of the water. And you know, it's come down recently just because the K was performed well, um better um in 2025. Um it reached the volatility, definitely reached its peak around 2023. Um and that's uh coincidentally when we actually launched this strategy. Okay. Um so we really saw an opportunity here to take advantage of that uh incredible volatility. Um not only is K Web uh volatile, it's also uh relatively uncorrelated, low has a low correlation um with global equity markets. So again, looking at the same Rust 2000 as like 100, um, you'll get a correlation of 0.41 or lower um to these markets, which is um difficult to get um in a lot of places, and certainly difficult to get in something as liquid um and uh dynamic um as of an investment as K Web, we think. So um that's certainly makes holding K Web itself valuable from a risk return perspective. Um but also it makes Clip's income stream and return stream all the more um attractive um because of that. Um if these are the other markets that you have in your portfolio, right? Clip can provide this kind of um uh uh you know little in little bit of an income buffer um as well as this kind of uncorrelated, low-correlated return, which can be very valuable in an overall portfolio. Um so yeah, as I said, the reason um you know Clip is able to give these uh high income distributions from the sale of its options is because of this uh implied volatility being much higher than these other markets, right? And so just to put this in perspective for you, on the right, we see um we have SP NASDAQ Russell um kind of providing uh monthly income. And this is assuming you're just selling kind of at the money calls, um, you know, using Black Souls pricing formula, right? Um so a lot of assumptions here, but basically, if you did this strategy on any one of those three, you would likely be getting a monthly income, you know, but in the 1.5 to 2.5% range. Um with K Web, it's it's it's it's twice that, so uh nearly 5%. And then so with Clip, you're gonna get, like I said, so remember you're exchanging the upside of K Web uh for uncertain downside plus income. Okay. Um but really what that creates is kind of a much smoother ride um with clip uh in terms of the nav, right? So the highest single day with about 5%, 10% per K Web, lowest one day return, you know, you similar kind of ratio here. So you are getting a bit of a smoother ride with Clip in terms of just the pure, pure nav. One of the ways that we've seen clients use clip is to complement their existing exposure to K Web or to China more broadly. Um and so uh with K Web, basically the way you can think about this is with K Web, you're getting 100% exposure to um this growth sector, the China internet sector, um, 100% downside, 100% of the upside, right? And then with Clip, you're exchanging that upside uh uh for the option income. Okay. And you could kind of barbell this if you wanted to, right? And really bring down your overall China Internet allocation or your China allocation. You can really bring down the volatility in that allocation. You can increase the income you're getting out of that allocation, right, by barbelling it uh between K Web and Clip, or even Clip and another China strategy if you're choosing, right? Um and so we think this is really powerful. Um it's a way that a lot of our, we've seen a lot of our clients uh work with clip. Um and the best part is you're still getting that growth exposure in the 50% to K Web and also through Clip, right? Clip still benefits uh when K Web goes up, right? So you're not losing that, right? And and so that's just what's kind of really powerful about clip. So this is just uh recent distributions. Um so one of the things I do want to say about our distributions and and and where we stand, um, because I know you you know I mentioned before, right? You know, you can get you can get an income level. So again, this is monthly, this isn't an annual yield, so the annual distribution rate is 25%. Uh this is looking at so the percentage I'm referring to is actually the monthly income. So you can actually generate 5% a month by doing this. And for a while we had uncapped distributions. So recently, at the beginning of this year, 2025, um, we decided to cap our distributions at 2%. Um and the reason, the reasoning for this was um to avoid the na what's called nav erosion, where um basically if you hadn't um been reinvesting uh your distributions just come, of course, come in the form of a dividend from the ETF, right? You would have had um you would have had just the nav consistently declining, right? And and you would have lost that reinvestment into the strategy, right? Which we think is very important. So we decided to cap distributions at 2%. Um initially we had a mixed reaction to this, but it's overall we we we've we believe it's improved the experience of our clients. And we've had a lot of people say, you know, this is much more preferable, that now they can kind of understand the strategy a little bit better. Um, you know, and they get some of that income because people weren't uh uh reinvesting. A lot of people wanted to use clip for income. Um, and so uh now we get you get that reinvestment uh into the strategy built in there, um, you know, uh between the differential between the two, cap and you know, what in recent months has been about 5% um in terms of income generation. Yeah, so that's that's clip. Um I don't know, Michael. Um do you have any any initial thoughts or I don't know if we're getting any questions or yeah, I'll take a look at QA.

SPEAKER_00:

As far as um what you see from advisors, if they want to mix the two ETFs, what kind of allocations do you typically see?

SPEAKER_01:

Um yeah, uh in terms of I mean we like to look at look at it and say, okay, you know, 50-50 um as a baseline. Um but we've seen people do many different things. Um we've seen people do um kind of more clip than K Web too, you know, people who maybe I think it depends on what your relationship with K Web has been um uh previously. Um whether you're a long-term holder, right, and you want to kind of maybe take some gains um and move it into something that's a little bit more uh a little bit less volatile, a little more, get a little bit more of that income generation there. Um, you know, we've seen that be uh a popular option as well. Um so I think it depends on your needs um and your relationship with with K-Web, if there was one previously.

SPEAKER_00:

So a good question from Brian here. Uh how much upside are you trading away with the coal sales?

SPEAKER_01:

Yeah, it's a lot of it. I mean, um clip is gonna, you know, K Web is up 30% this year, for example. Um and clip is about flat year to date. So um and K Web is up 30%. So you are exchanging a great deal of that upside. Um clip would benefit from the best environment for Clip is probably the one we've had this year. Oh, and or one where K-Web is a little bit maybe not so um bullish, um, but just kind of steadily inches along. Uh but um, you know, you are exchanging that upside down. No, sorry, the nav of clip is flat, is what I meant to say. But the the total return will be higher because if you're reinvesting um those um dividend distributions that you're getting from clip, if you're reinvesting those, um, you know, you you are getting a significant return, right? So um let's see, um we don't actually have a year to date here, but um six months. So this is total return. Um you have 13% um for clip um and 20% for um K Web. That's as of 9 30. Um so it is it is a significant amount of the upside you're exchanging. But again, because we cap the 2% as well, um you you you uh clip should see a little bit more nav appreciation than than the past strategy.

SPEAKER_00:

Let's talk about the uh tax treatment of those uh distribution rates. Is it ordinary income? Are you doing something else there?

SPEAKER_01:

Um yeah, it's so it's ordinary income. Yeah. Um you it's funny because um we actually sometimes it'll show up in our 1980s as return of capital just because it lowers the basis. But on uh from a tax perspective, it's it's ordinary income. Um, you know, we don't give tax advice, so I'd recommend somebody speak with uh your tax professional, but um uh that's ordinary, uh ordinary taxable um income. Yeah, there's not really a tax uh advantage.

SPEAKER_00:

Do you find that um these type of strategies more resonate with the retail as opposed to advisors in general?

SPEAKER_01:

Uh that's a good question. Um we have seen interest from both. Um I think initially uh just because of the income level was so high. Again, you know, if you before we capped the distributions, right, it was uh 5% and even higher than that monthly, right? So we definitely saw a lot of retail interest um from people seeing that just high yield number on the strategy. So these are people who are buying the single stock yield yielding ETFs, right? Um, that became popular. Um and so clip was kind of getting some interest in that crowd. Um and then when we captured 2%, I think the interest was a little bit more with advisors um uh just because they weren't kind of chasing after that yield. They wanted something a little more stable, a little more predictable. Um yeah, I think a lot of our K Web using advisors um were big fans of of Clip. Um but yeah, it's it's mixed. It's a mixed uh interest.

SPEAKER_00:

Uh again, folks, for those that are here for the CE credits, I will email you after this webinar to get your information. Um let's talk about the diversification aspects against other options income strategies. You mentioned, I think, 200 plus that are out there. Uh when you look at correlations, uh, how does that stack up?

SPEAKER_01:

Um clip, I would say uh is very you're is very uncorrelated to most of the um either whether it's covered call or um the uh uh single stock. I mean, I mean if you talk about options related, obviously there's a big universe there, but even just covered call strategies mostly have focused on US markets uh in this marketplace. Um and clip is just different. Clip is not gonna be um uh the same. Clip is like I said, you know, K Web the correlation for K Web is 0.4 or lower. Um right. And so with Clip, you're gonna get kind of the same thing, right, when it comes to US markets. Um clip is a higher income level because you have this um volatility, just higher volatility, like I said, and and very uncorrelated to US markets. We actually did uh some analysis um of the marketplace. And Clip is, I believe, uh it's one of only a very few um covered call strategies available in the US that actually uses an international market as the underlying. Um it's I think it's the one of three, four, or five uh if that. Um and so yeah, it's really unique um exposure. Um if you've been using covered calls, um this is certainly gonna add uh to your portfolio um and diversify significantly, even within your covered call portfolio if you have one.

SPEAKER_00:

Yeah, I think that's a good point. Um anything else you want to bring up? Any uh other suggestions or other funds you want to bring up that might pair well against Clip?

SPEAKER_01:

Um yeah, sure. I mean, so as I mentioned, K Web, um, but also um uh we have you know various uh China strategies, right? Um we have KBA in in A shares, um, so that's um kind of you're getting a uh a beta there um to the A shares that's onshore market, um, right, which has not uh seen the same performance uh this year as the offshore market. Um and we think that it's due for a little bit of a comeback, um, which is also um thanks to um just dynamic local dynamics in mainland China, where we see investors going more local investors uh going more into stocks from historically low allocation levels to stocks. Um and that's a long-term phenomenon. So we think that KBA there could have um some upside, right? And then you could also pair that with Clip because Clip, again, like I said, you know, you could pair it with KO, but you could also pair it with um any kind of China exposure um that you want, um, and it'll give you a little bit of income protection. Obviously, uh the underlying is that uh uh offshore market, right? So you could also pair it with onshore market um for a little more diversification. I think that would be um interesting um as well. Um so and if you're interested in the option space, um we've also recently had uh multiple um single stock lever ETFs um come out. Obviously, those are um we have a lot of retail clients in those, um, but those are those are actually on our top uh names within the KWeb portfolio. So Alibaba, PDD, and we just did JD as well. So those are pretty interesting. And then KMQ, we also have KMQ, which is takes this kind of innovation story, the internet innovation story that we've seen in China and that consumer story and broadens it out further to encompass all of emerging markets and say, look, we want to have the um consumer technology names, call it, that's what we call it, emerging markets, consumer technology, and stripping out all that old kind of low growth stuff, right? Which is industrials, financials, just stripping that out and just going for we want the we want the consumer, we want the technology. So that's, you know, things like companies like Mercado Libre in Latin America, e-commerce, they've done very well. SEA in Southeast Asia or C, as I think it's called, they've done very well. So anyway, expanding that K Web thesis to broader emerging markets through K and Q. That's another strategy that's going to see higher correlation with K Web. But if you're more interested in kind of the broader emerging market story, you might want to look at K E M Q for that. And then you could also pair that with Clip though, because and it would make sense because again you got a lot of the K Web names still in there. So you are going to see this kind of correlation and then you're going to get also the income as a little bit of a buffer. So yeah I think those would be the main ones that I would kind of mention in relation to clip and China Internet.

SPEAKER_00:

That's a good place to wrap up this webinar appreciate those that are here. Hopefully you found this interesting take a look at clip and Henry as always I appreciate your time here. Yep. Thanks Michael thank you everybody cheers. Bye

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Michael A. Gayed, CFA

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