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

In this episode of Lead-Lag Live, I sit down with Jonathan Shelon, Chief Operating Officer at KraneShares, to unpack how the firm’s KLIP 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 KLIP with core equity or income portfolios.

In this episode:
– Why KLIP’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 KLIP complements both equity and fixed-income allocations
– Why KraneShares sees long-term growth in combining KWEB and KLIP

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Episode Transcript

SPEAKER_01 (00:00):
If you look at correlation, which is how things
move together, the NASDAQ andthe SP are very highly
correlated.
And what's worse is they tend tobe very highly correlated on the
way down.
And in a covered call strategy,there's still risk.
You could still have thesedrawdowns, and then you have to
earn income to chip your way outof it.
What you'll find is that in alot of the US-based strategies,

(00:23):
they're earning 1% to 2% a monthof option income compared to our
3% to 5%.

SPEAKER_00 (00:56):
One strategy getting a lot of attention right now is
Clip, CraneShares China,Internet covered call ETF.
It owns the KWeb exposure andsells calls on top, which has
translated into sizable monthlypayouts and mid-teens returns so
far this year.
We'll unpack how it works, whatmakes it different from U.S.

(01:16):
focused income funds, and howadvisors are using it in the
real world.
My guest today is JonathanShellon, Chief Operating Officer
at Crane Shares.
Jonathan, welcome.
It's great to have you here.

SPEAKER_01 (01:28):
Melanie, great to be here.

SPEAKER_00 (01:31):
Let's start with the origin story.
Why did Crane build Clip in thefirst place?
And what problem were you tryingto solve for investors?

SPEAKER_01 (01:40):
Yeah, no, it ties back to the comments you made
early on.
There's been a lot of interestover the last three to five
years and covered callstrategies in general.
When investors start to worryabout volatility or they want to
generate income from theirequity portfolio, they turn to
covered calls.
Historically, people had donethis on their own.

(02:02):
They would buy, say, aparticular stock and then sell
call options on that stock togenerate some income.
But more recently, say withinthe last five years, uh ETFs
have cropped up that do this notjust on a single stock, but on a
full basket.
And the popularity started withthe S P 500 covered call

(02:24):
strategies and the Nasdaqcovered call strategies.
And when we thought about thespace and started researching
the space about three years ago,we realized that we had
something really unique tooffer.
In part because our flagshipstrategy, KWeb, which is a China
Internet and e-commerce ETF thatwe launched about 12 years ago,

(02:47):
would generate meaningfully moreoption income than a lot of the
things that have beenpopularized.
So we thought let's see if wecan put something together
that's really unique in themarketplace that we would love
to invest in ourselves.

SPEAKER_00 (03:02):
Yeah, so most covered call funds crowd around
the US megacaps, basically.
What are some of the otherthings that truly differentiate
Clip from the underlying marketyou target?
And how do you implement theoptions overlay?

SPEAKER_01 (03:15):
Sure.
So the the big distinction isthat we already have an ETF
called K-Web that invests in 30uh internet and e-commerce
stocks.
And there are two features thatmake this different than, say,
an S P 500 covered call strategyor a Nasdaq covered call
strategy.

(03:35):
One, we're investing incompanies that are listed on the
US stock market, but also on theHong Kong stock market.
Two, the basket is narrower,right?
We're not investing in 500stocks or 100 stocks.
KWeb holds about 30 individualsecurities, which makes it more
volatile.

(03:56):
And remember, when it comes tocovered call strategies,
volatility isn't a bad thing.
It's a good thing because morevolatility means more option
income.
So what we do is we invest inKWeb and then we write calls or
we sell calls on K Web itself,on the ETF itself.

(04:18):
And this generates, hasgenerated monthly income
somewhere between 3 and 5% onaverage 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 incomeeach and every month.
And then we pay out about 2% ofit.

(04:38):
So we we make sure that we payout a meaningful amount and we
limit that payout at roughly 2%.

unknown (04:47):
Okay.

SPEAKER_00 (04:47):
So that's what I wanted to ask.
How does it translate into thedistributions for shareholders
over time?
Will that change or how is thatput sort of set into stone?

SPEAKER_01 (04:59):
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 uh2%.
And uh we think that's valuablefor investors for two reasons.
One, it's a high distributionrate, right?
Roughly 24% per year, but italso leaves potential for upside

(05:24):
because those proceeds go rightback into the strategy.
So it's as if we're doing alittle 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 automaticrebalancing feature, which a lot

(05:45):
of investors favor.
So in a year like this year, youcan look month over month over
month.
We've distributed 2% a year.
And not surprisingly, ourreturns this year, because it's
been a good year for K-Web, areup between 18 and 20%.
Uh so this is a this is a strongyear for this type of strategy.
And I should mention, not allcovered call strategies have

(06:08):
been up 18 to 20 percent thisyear.
Um, from a performancestandpoint, the strategy's been
quite differentiated.

SPEAKER_00 (06:15):
So the big picture on portfolio design, does
diversification matter?
You've you've talked about thethe it how how KWeb is it
diversified.
Does it matter when there is acall strategy on top of it, the
way that it does for coreassets?
And how should people thinkabout spreading risk across um
underlying volume of genes andoption strikes, for example?

SPEAKER_01 (06:37):
It's it's a really, really important point because a
lot of people think if I own anSP 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

(06:57):
together, the NASDAQ and the SPare very highly correlated.
And what's worse is they tend tobe very highly correlated on the
way down.
And in a covered call strategy,there's still risk.
You could still have thesedrawdowns, and then you have to
earn income to chip your way outof it.
Um, what you'll find is that ina lot of the US-based

(07:18):
strategies, they're earning, youknow, 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 thatincome back.
Um, when we have any kind ofdecline in value, we tend to
chip away out of it prettyquickly.

(07:39):
Um, so why does why does thatmatter?
Well, if you diversify bycombining a US-based strategy
with Clip, which is aninternational covered call
strategy, it benefits you in twoways.
One, you diversify that drawdownrisk we talked about because the
stocks we invest in don't godown at the same time as U.S.

(08:02):
stocks.
They have their own cycle.
And two, our distribution ratetends to be twice as high as
what you receive for from manyof the US-based strategies.
So you're diversifying thedownside, but you're also
diversifying the income stream.

SPEAKER_00 (08:18):
Yeah, and and so something advisors always ask
about is taxes.
I want to ask how do you thinkabout tax efficiency with a high
distribution strategy like this?
And what should clients knowabout the character of those
payouts in terms of taxes?

SPEAKER_01 (08:33):
Yeah, no, and and taxation is always um, you know,
one of these more complicatedmatters.
The way that we think abouttaxation here is um we've we've
tried to structure CLIP to uhhave certain characteristics
that make it more tax effective.
And again, for something to betax efficient is very difficult,

(08:57):
um, unless you're investing inmunicipal bonds or things that
are explicitly protected fromtaxation.
What you can really do in an ETFwrapper and with an income
strategy um is to reallyincrease tax efficiency.
So we've taken certain steps toachieve that by making sure that
for every share of K Web we own,we write one share of call

(09:21):
options.
And um, to avoid certaintreatment, that would be a
penalty from a tax standpoint.
But by and large, you know, theincome that you're gonna receive
is gonna be taxable, right?
So I just want to be reallyclear.
It's not as if we can somehow umdefer magically avoid taxation.
You're gonna have to deal withtaxes.

(09:42):
And in our case, because thedistribution rates are high, the
tax bill may be higher.
Um, but just rest assured thatwe are taking steps internally
in management of the fund to tryto avoid some of the penalties
that relate to something calledmixed straddle.
It's probably too much to coveron this call, but um just
something to note that becausewe're investing in the actual

(10:05):
ETF, K Web, and writing calls onthe ETF, uh, there are certain
benefits to doing so.

SPEAKER_00 (10:14):
Yeah, and I wanted to ask you for, I mean, K-Web is
a very popular ETF, but for someof our viewers who may not know
a lot about it, could you talk alittle bit about what the
strategy is there and some ofthe holdings and and and how you
continue to manage or howcontinues to manage it?
Sure.

SPEAKER_01 (10:29):
So KWeb is um nearly a$10 billion ETF.
It's the very first ETF thatCrane Shares launched.
And Crane Shares is known as amanager that specializes in
China and climate investing andalternative investing.
And so this was our very firststrategy because our founder,
John Crane, who as anentrepreneur had actually lived

(10:51):
in China for a while, saw allthese fantastic mega trends that
were occurring there.
Uh, urbanization, rapid wealthcreation, technological
adoption.
And when he came back to theStates, he said, how do we give
investors exposure to theseamazing growth opportunities
that exist there?
And when he looked around, therereally wasn't anything like a K

(11:13):
Web.
So he felt really an obligationas an entrepreneur to bring this
to market.
So K-Web is really uh investingin the very things that signify
growth in China, namely internetand e-commerce names, names like
Alibaba, Baidu, Tencent,Tripop.com, Pinduoduo.

(11:33):
Some of these are householdnames to American investors,
some are not.
But it's a concentrated basketof 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 35and 40% year to date.
So Clip has benefited from thatgrowth, but also providing an

(11:55):
income stream in addition.

SPEAKER_00 (11:57):
So can you just lastly, uh, before we I ask you
a final question, can you justtalk about a little bit about
how an investor might fit KWeband Clip into their portfolio
amongst other securities orETFs?

SPEAKER_01 (12:12):
Sure.
So there are a couple of waysthat investors are using clip in
portfolios.
One is, as you mentioned,blending it with K Web.
Clip dampens risk, it dampensvolatility and creates income.
So a lot of our early investorsin Clip were actually people
that were already familiar withK Web and they said, I'm just
going to put these together50-50.

(12:33):
Now I get not just growth, I getgrowth and income.
So that was an interesting wayof putting Clip into their
equity portfolio, into theirequity bucket where they already
own K Web.
Another thing that we saw as ause case was people that are
building income-based portfoliosthat include not just

(12:53):
traditional bonds, but couldinclude high-yield bonds, other
sources of credit, maybe evendividend-paying stocks, they'll
use covered, they use coveredcall strategies there.
And Clip is very good atincreasing the distribution
rate.
If people are focused ongenerating a certain amount of
monthly income, it's very usefulto have Clip in that kind of

(13:14):
portfolio.
And then I'd say the last usecase, and we actually do this in
some of the model portfolios wemanage, we look at Clip as an
alternative investment.
So it has low correlation totraditional stocks and bonds.
So if you're really trying todiversify an overall portfolio,
clip could actually also be inthat alternatives bucket, which

(13:37):
many investors are increasinglyincreasing exposure to.
So those are really the threeways.
Blend it with KWeb, place itinside of an income portfolio,
place it inside your alternativesleeve.
Um, and it's it's been quitepopular, I think partly because
of its returns and how well it'sdone since we launched it about
two and a half years ago, butalso because the complementary

(14:01):
role it plays to the SP andNasdaq based cover call
strategies.

SPEAKER_00 (14:06):
Yeah, the returns are definitely something that
people should go and take a lookat.
Also, uh Jonathan, finally, foranyone who wants to learn more
about Clip or connect with youand the team at Crane Shares,
where's the best place for themto go?

SPEAKER_01 (14:17):
Sure.
It's uh craneshares.com.
That's K-R-A-N-E shares.combackslash clip K-L-I-P.

SPEAKER_00 (14:26):
Great.
Well, Jonathan, thanks so muchfor joining me, and thanks to
everyone for watching.
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