May 26, 2025 • 48 mins
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.
Riddler Road Rally is not your average adventure. It’s a live, citywide scavenger hunt on wheels, that will be the most fun you have this summer!
Riddler Road Rally is hitting eleven cities across Utah and Idaho. Each rally brings new clues and its own vibe, with pre-rally parties, swag giveaways, and surprise diversions. Whether you rep your hometown or hit every stop on the Wasatch Tour to climb the 2025 leaderboard, the choice is yours.
You and your team will race across t
Sign up to The Lead-Lag Report on Substack and get 30% off the annual subscription today by visiting http://theleadlag.report/leadlaglive.
Foodies unite…with HowUdish!
It’s social media with a secret sauce: FOOD! The world’s first network for food enthusiasts. HowUdish connects foodies across the world!
Share kitchen tips and recipe hacks. Discover hidden gem food joints and street food. Find foodies like you, connect, chat and organize meet-ups!
HowUdish makes it simple to connect through food anywhere in the world.
So, how do YOU dish? Download HowUdish on the Apple App Store today: Support the show
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
What is a covered call strategy?
Speaker 2 (00:01):
So a covered call strategy is?
It just means that you're goingto buy a stock.
So usually let's say awell-known name Apple, google,
what have you?
And then you sell a call manytimes at the money.
Speaker 1 (00:16):
Take me through sort of why it is that we've seen so
much interest in this type ofapproach.
Speaker 2 (00:21):
The trend has been pretty crazy, I have to say, and
I think it has to do with a lotof things.
We talked about the advent ofcovered calls being a great way
to do something in a stockportfolio when you're not
certain about the direction andto generate income option income
that could be paid out monthly.
Speaker 1 (00:43):
My name is Michael Guy, a publisher of the Lead Lag
Report.
Again, this is a sponsorconversation by Craneshares.
We're going to talk about oneof their products in particular
that has held a run and it'sactually an interesting strategy
in terms of what's behind it.
Here we've got JonathanSchellen.
So, jonathan, first time youand I are chatting we've been
joking a little bit before goinglive here, but introduce
yourself to the audience to me.
(01:03):
We're going live here, butintroduce yourself to the
audience to me.
Who are you?
What's your background?
What have you done throughoutyour career?
What are you doing atCraneShares?
Speaker 2 (01:07):
Sure, absolutely, michael.
Thanks for having me on andthank you to everyone viewing
this who decided to join us here.
So a little bit about myself.
I'm the chief operating officerat CraneShares and have spent
many decades in the investmentindustry.
I've been at Crane for about 10years as the COO and I do
(01:28):
manage some of the ETFs that wehave here, and I've spent time
at large organizations managingmoney as well.
So I have a lengthy backgroundin finance, in asset management,
and I'm really excited to behere today talking to you about
covered call strategies andthings like.
Speaker 1 (01:49):
CLIP, all right.
So let's get right into it andlet's go very bare bones.
Basic, first and foremost,because you hear a lot about
covered call strategies andobviously there's a tremendous
amount of demand for these typesof vehicles and employees that
overlay.
What is a covered call strategy?
Speaker 2 (02:06):
Sure.
So a covered call strategy issomething that's not
particularly new.
It's been around for a longtime.
It just means that you're goingto buy a stock.
So usually let's say awell-known name Apple, google,
what have you?
And then you sell a call manytimes at the money.
So meaning, if Google istrading at X, you're going to
(02:31):
sell a call at X and that allowsyou 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 stockappreciates, you're not going to
get that upside because you'vegiven it away in exchange for
(02:51):
that premium.
So the way I think about it isif you own Apple stock and you
decide well, you know what it'sin a volatile trading range,
it's not going to keep going upthe way it used to.
Trading range, it's not goingto keep going up the way it used
to.
Covered call strategies areused to do something with that
security over a period of timewhen you think it's just going
to be range bound.
(03:12):
And so what's happened is, overtime, etf firms have been very
innovative and said well, youreally don't have to do this on
your own and you certainly don'thave to do it with a single
stock.
So the early ETFs that builtcovered call strategies focused
(03:33):
on writing calls on the entireS&P 500 or the NASDAQ, and you
know we can talk about what thatmeans and what that does to
your potential outcomes.
Speaker 1 (03:44):
Okay.
Now, there are nuances to this,because a lot of it also is
dependent upon what term you'reusing.
As far as the selling of theoption, what strike liquidity of
the options themselves in themarket?
Talk me through some of theseinteresting characteristics when
it comes to putting together aninsightful approach.
Speaker 2 (04:03):
Sure.
So if you're writing a coveredcall option, it is really
important to identify over whatperiod of time or what tenor of
the option you're going to beselling.
In our case, and we'll get moreinto this we tend to focus on
the 30 to 35 day range forwriting calls.
For the types of options thatwe write, that tends to be the
(04:24):
sweet spot and allows us togenerate option income that's in
somewhere in the three to 5%range per month, basically.
But every investor is a littlebit different and you can write
a longer call option.
Many securities have calloptions that go out to a full
year, but that also means thatyou're trading upside for a full
(04:47):
year in exchange for thatincome.
So that duration or tenor ofthe option is very important.
And the strike price is alsoreally important money, which
means you're writing it atpretty much the price where the
stock is today.
That means you're giving up allof the upside in exchange for
(05:09):
more income and if you write anoption, that's out of the money.
So let's say that if a stock istrading at $100, you write the
option at $110, that means thatyou still have $10 of upside in
the stock, but the income thatyou're going to generate for
writing an out-of-the-moneyoption is going to be lower than
(05:32):
the income that you wouldgenerate from an at-the-money
option.
Speaker 1 (05:36):
So I mentioned there's been a lot of demand for
these types of funds that havea cover call overlay to them.
Take me through sort of why itis that we've seen so much
interest in this type ofapproach.
Speaker 2 (05:48):
The trend has been pretty crazy, I have to say.
If you look back over the lastdecade.
It's been hyperbolic,particularly post 2020, 2021.
And I think it has to do with alot of things.
You know, we talked about theadvent of covered calls being a
great way to do something in astock portfolio when you're not
(06:12):
certain about the direction, andto generate income option
income that could be paid outmonthly.
So what happened is we saw,over the last few years in
particular, the explosion ofcovered call AUM.
So assets under managementthey're now north of a hundred
(06:34):
billion in this derivativeincome space and there are more
than a hundred covered call ETFsthat are available.
So now, mind you, there are acouple of big players, some
leading firms and some leadingmethodologies, mostly focused on
domestic equities, us stocks inparticular, and then tech as
(06:59):
well.
Those tend to be the dominantareas, but there are growing
trends in things like singlestock covered call ETFs, which
is interesting, right, becausethe advent of ETFs is to create
a basket, but there seems to bea trend, in some ways, to go to
single stock covered call.
Writing, which was really howthe strategy was introduced a
(07:23):
long time ago.
Which was really how thestrategy was introduced a long
time ago, and then now there'salso a trend towards
international covered calls, andthat's where we excel.
I should have mentioned earlyon that GrainShares as a firm is
really focused on China,emerging markets and alternative
investing, so we give uniqueaccess to strategies around the
(07:45):
globe that tend to be quitedifferent than what you would
traditionally own in a portfolio.
So a lot of individuals owntraditional stocks and
traditional bonds.
Crane Shares is very focused ongiving you extended asset
categories that tend to have lowcorrelation to things that you
may have owned in the past.
So CLIP, our internationalcovered call strategy, really
(08:09):
symbolizes that very thing.
It's very much in line withwhat we do at Crane and we're
excited about it.
Speaker 1 (08:16):
I don't want to expand on that, but I want to go
back to this demand and kind ofwhere it's coming from.
I get the sense that certainlyamong the retail since you
mentioned even the single stockside of things a lot of this
demand for income comes fromconcerns around inflation,
obviously right, but on top ofthat, I think, also a distrust
of bonds.
You know, increasingly you'restarting to see more and more
(08:39):
wanting to have alternativesources of yields.
Yes, right Of bonds, right.
So let's talk about that,because that's an interesting
sort of dynamic and trend and itdoesn't seem like it's over.
Even as we're chatting here onMay 21st, I mean, yields are
again rising.
Speaker 2 (08:54):
It's really it's such a good point.
This trend accelerated after2022, right, so think about when
the Fed started to hike ratesagain.
We saw more appetite, moregrowth in yield enhancing
strategies, and so we believethat the appetite for yields
beyond traditional ways ofgetting exposure to yield a la
(09:18):
government bonds, high yieldbonds, corporate bonds it's
really strong.
The appetite is very strong andI'd say it's interesting too,
because more and more investorsare building.
Clients that we engage with areactually building yield-centric
portfolios.
Right, it used to be that you'dhave a 60-40, you'd have your
(09:39):
stock and bond mix, but now werun across advisors that are
building portfolios that arededicated to generating income,
and those portfolios may havedividend paying stocks,
different types of credit, highyield bonds, so forth and so on.
Emerging market debt andincreasingly, derivative income
(10:02):
strategies like covered callstrategies are part of that mix.
So I think this trend continues.
We're seeing it in the assetnumbers, we're seeing it in the
number of ETFs in themarketplace, and we have a
number of examples where wethink it's actually pretty smart
to mix these strategiestogether within an income
(10:24):
approach.
Speaker 1 (10:26):
Okay, so let's on the international side.
Obviously on the China andinternational markets, this year
in particular, have done quitea bit better than US markets,
and you and I both know it'sbeen arguably a horrendous cycle
for anything outside of USinvesting.
Most things outside of the USborders have not just
underperformed, butunderperformed meaningfully.
(10:46):
Maybe there's a shift starting.
I myself have made the argumentmany times that I would bet
that the next four years China'smarkets outperform the US
markets, and that has nothing todo with Trump and everything to
do with starting valuation.
Yep, but first let's make thecase for international investing
and then we'll get into thecover call clip sign if you
(11:27):
invested in US stocks alone, youwon.
Speaker 2 (11:28):
You systematically outperformed most equities
around the world and if you lookat, say, the US markets versus
emerging markets, yououtperformed by an average of
10% to 11% a year over the last12 or so years.
So for a lot of investors,either because you're new or
because you think this is a newparadigm, you are led to believe
(11:49):
that US investing orconcentrating your equity
investments to the US is thesuperior approach.
But what people forget is ifyou go to the 12-year period
before that, starting in theearly 2000s and going to around
2011,.
2012, you will have seen themirror image.
(12:10):
You will have seen emergingmarkets systematically
outperforming US equities with ahigh consistency and an
outperformance of around 10% to11%.
So literally the mirror imageof what we've seen over the last
11 to 12 years and the tell.
The thing that you can look atto help understand how or why
(12:35):
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 outperformingmeaningfully.
And in the last 10 to 12 yearsthe dollar has been
strengthening to the tune ofabout call it, three, three and
(12:58):
a half percent a year, so 40%cumulatively.
But that trend is changing andit's rapidly changing, in part
because we believe that Trump ismaking diversification great
again and all the things thatworked over the last decade.
We're starting to see a shift, achange.
Currencies are off eight to 10percent this year if you look at
(13:20):
the dollar on a trade weightedbasis.
International, therefore, isoutperforming meaningfully this
year.
China is outperforming.
Our flagship ETF, k-web, isoutperforming the S&P by 15%
year to date.
Our funds up about 16.5% andthe S&P is up about a percent
(13:42):
and change maybe flat now if weincorporate today.
The S&P is up about a percentchange maybe flat now if we
incorporate today and the10-year.
Look what's happening withbonds.
This is really unusual.
So all of a sudden, the thingsthat didn't matter over the last
decade, namely diversification,are really starting to matter
again and it's forcing everybodyto relook at how they're
(14:03):
managing their portfolios.
Speaker 1 (14:05):
Okay, let's talk specifically about China first,
around the view from the greenshare side of things, around
tariffs and how negotiationscould play out.
Again, I've also argued thatthe irony of tariffs is that it
may actually be more beneficialfor China than the US because
it's going to maybe force somestimulus to get some domestic
consumption to pick up, sothere's less reliance on the US.
(14:26):
But talk us through a littlebit around sort of the thesis
for China from a longer termperspective and then we're going
to bring it to investment ideas.
Sure.
Speaker 2 (14:35):
So, if you think about what's been happening, the
Trump administration, withLiberation Day, has brought
about tariffs across a number ofcountries, but was really quite
aggressive with China,providing tariffs that were
about 145% in the announcements,and then, of course, china was
(14:57):
reciprocating and placingtariffs on US goods of upwards
of 125% and this was April.
Then, a month later, so earlierthis month, we had a
breakthrough where there was adecision to really work this out
and negotiate a 90-day periodover a 90-day period, whereby
(15:19):
tariffs in this interim periodwould drop down to 10%.
So right now we're in thisquiet negotiating period.
The market has had a sigh ofrelief and if you watch even US
equity markets in particular,you will have seen that, post
that 90-day announcement, thevolatility dropped.
So it was measured by the VIX.
This is the volatility in theUS markets, and the US markets
(15:41):
started to regain their climband the US markets started to
regain their climb, thetrajectory that they were on
earlier in the year.
So, clearly, amongst all thedifferent things that are
happening in the world and allthe different treaties and
things that are being worked on,the one that was most impactful
for the US markets was actuallythe conversation with China,
(16:03):
and this can't be a surprise.
The US is the world's largeststock market, the world's
largest economy, the world'slargest bond market, and China
is the world's second largesteconomy, the world's second
largest stock market, theworld's second largest bond
market.
So these two countries arereally important on a global
scale, as is their relationship,and the crane view is that
(16:26):
talking about trade and deficitsunderstates the value of the
relationship, and I'll explainwhy.
So we have a traded goodsdeficit with China that's just
under 300 billion, which meansthat we buy more goods from them
than they buy from us, to thetune of about 300 billion.
(16:49):
And I think that the actualnumbers are we buy about $440
billion worth of stuff fromChina and they buy 100, I have
the number here somewhere.
Call it $145 billion worth ofgoods from us.
Now, that doesn't includeservices.
We actually have a servicesurplus with China.
(17:12):
So the number that we have adeficit of is really below $300
billion.
It's not terribly huge, and Isay that because, consider this
U companies in the S&P earn overa trillion dollars of revenue
in China.
That is not captured in thosetraded goods or services numbers
(17:33):
.
In other words, think aboutcompanies like Apple and
Starbucks and GM and Tesla thetop companies in the S&P are
making a trillion dollars inChina.
China is a huge market for themand it's a big part of their
growth.
So when we sit here and wesaber rattle over a couple of
(17:56):
hundred billion dollars in tradeone way or the other, that
really understates theimportance of the economic
relationship between these twocountries, and that's why we
believe that cooler heads willprevail.
This has been our view for sometime.
We know that the people thatare in charge do understand this
(18:19):
from both sides and they wantto have a good economic outcome
for both countries Because,ironically, the things that we
need and the things that Chinaneed are quite complementary,
and so we can help each otherwith some of our local
challenges, and I'm happy toshare more about that.
(18:39):
The final point I'd make is thatover the last few years,
because of some of thegeopolitical tensions and just
the strength of the Chineseeconomy, chinese stocks have
become super cheap.
Pe ratios for China tech are,call it, mid-single digits, so
(18:59):
around 15, 12 to 15, dependingon how you're looking at it, and
then growth remains quite high.
So earnings growth in China isquite high.
So to your point earlier,michael, the fundamentals are
quite compelling in China,whereas in the rest of the
market, the equity markets, manyof them, including in the US,
(19:21):
are near record highs, not justin index levels but also in
terms of their fundamentals.
Speaker 1 (19:25):
Let's talk about ways of accessing China's markets.
Obviously, CraneShares is verywell known for K-Web.
Let's talk about that fund.
And then let's talk about howClip is an interesting spin on
it.
Sure, absolutely.
Speaker 2 (19:39):
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 arehappening in China.
It focuses on China's internetand e-commerce segment.
(19:59):
People think about China as amanufacturing country, which of
course it is, but China has 1.4billion people that are very
tech savvy and rely on the techindustry to do a lot of
consumption.
So we may have firms in the USlike Amazon that we rely on, and
(20:24):
other firms like Google.
So, whether it's for shopping,communication, well, china has
firms like Alibaba and Tencent.
So for many of the USequivalents that we rely on as
US consumers, china has theirown equivalents that are relied
upon by Chinese consumers.
So the KWeb ETF bundles 30 ofthese leading names in the China
(20:49):
internet and e-commerce space.
So names like Alibaba and Baiduand Tripcom and Tencent and JD
and Pinduoduo.
So these may not be householdnames in the US, but they are
100% household names in China,and these are companies that are
also at the center of a lot ofthe innovation that's happening
(21:09):
technologically.
One of the reasons that K-Webis performing so well this year
is because, when DeepSeek wasannounced, it became very clear
that China is very much in theAI race no-transcript.
Speaker 1 (21:59):
And flows have been remarkable both in and out, as
sentiment has waned and gone infavor of China over the years.
Yeah, now let's talk about howCLIP plays into it.
First of all, obviously youidentify correctly that there's
this mega trend towards covercall strategies.
Most people think about covercall strategies for US funds.
This is different.
Speaker 2 (22:21):
It is.
It is.
So one of the things that'samazing and what's led to the
development of CLIP, is the factthat KWeb has an extraordinary
options market that hasdeveloped around it.
So when you launch an ETF, manytimes, once the ETF grows to
scale say billions of dollars inassets and has a wide following
(22:42):
, like KWeb does an optionsmarket will develop.
So you'll start to see calloptions and put options and
different tenors and so on, andthat's really exciting because
if you're an ETF issuer, like weare, you then have additional
tools to build custom strategies.
And so what we realized instudying the covered call space
(23:06):
and we did this for about a yearbefore we launched Clip back in
2023, we started to realizethat there really weren't any
covered calls that were focusedon a basket of securities
outside of the US.
The other thing I shouldmention is that we also realized
that by creating a covered callstrategy around K-Web, our
(23:31):
flagship ETF, by using thosevery options that I spoke about,
that we should be able togenerate higher levels of option
income than some of theflagship 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 concentratedbasket of stocks, and those
(23:56):
stocks tend to be more volatilein and of themselves.
So what happens is, when youwrite call options on a more
volatile basket, you generatehigher levels of option income,
and so the option income thatwe've been able to generate and
clip over the last two yearsthat we've been managing it has
(24:18):
been somewhere in the three to5% per month range, which is
really attractive.
Speaker 1 (24:24):
I've got to assume you have to sort of wait for a
certain moment in time to reallythink about launching a
strategy like this, meaningyou've got to have the liquidity
, you've got to have the optionsmarket being deep when it comes
to $7 billion range.
Speaker 2 (24:35):
So the notional value of options traded in or owned
in KWeb are roughly the samesize as the ETF itself.
(24:59):
That's really significant andthat may not help.
But think about it in arelative way.
Across all 4,000 plus ETFs thatare out there, kweb is the 14th
most optionable ETF.
So it's in that top universe ofETFs with option liquidity.
(25:20):
Think about things like the S&Pand the NASDAQ and so forth and
so on.
So if you're familiar with SPYor QQQ and those of course are
leading optionable ETFs but KWebis among those top most liquid
optionable ETFs, which meansthat it has a really wide
(25:42):
following, not just byindividual investors and wealth
managers, but also institutionalinvestors, hedge funds and
foundations, endowments, familyoffices really the full spectrum
of investor types are able togain exposure to K-Web either
directly through the ETF orthrough the options market.
Speaker 1 (26:03):
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 fixedincome, obviously.
Speaker 2 (26:14):
instrument it's not, and so, unlike, say, a fixed
income instrument where theyield that you generate is
entirely driven by what happensto the yield curve, with covered
call strategies there's almosta linear relationship between
something called impliedvolatility and then the option
(26:35):
income that you're able togenerate.
In other words, when impliedvolatility is high, then option
income goes up.
When implied volatility goesdown, then option income goes
down.
A good way, if folks listeningin are familiar with the VIX,
(26:56):
the VIX is the impliedvolatility for the S&P 500.
That's what the VIX actually is.
So as the VIX is moving up anddown, the amount of income you
could generate from the S&P isalso moving up and down linearly
.
So you could think about itthat way, right?
So when the VIX goes from, say,a level of 15 to 30, then you
(27:21):
would expect being able to earntwice as much on your covered
call options in an S&P product.
The same thing holds for KWeb,or Clip rather, that writes
covered calls on KWeb, and we'veseen this episodically We'll
see volatility spike, and thatgives us better opportunities.
(27:44):
Just in the month of April, wesaw volatility spiking because
of some of the tariffsannouncements and some of the
rhetoric, and we were able towrite options for the month of
April at a level of about 6% forthe month, which is more
attractive than our long-termnumbers, which tend to be
somewhere in the 4%, 3.5% to 4%range.
(28:07):
So that's actually aninteresting dynamic right, when
volatility spikes, meaningthere's something happening in
the markets, you actually havethe ability to generate slightly
higher yields, or I shouldn'tsay yields, but slightly higher
option income.
Now, that said, those periodsof heightened volatility tend to
(28:28):
also be associated withdepressed returns, so the two
things tend to balance eachother out.
Speaker 1 (28:35):
Is it an either or type of situation, meaning if
you're going to position toChina using a China fund to be
in clip or K-Web, or is theresomething maybe to blending the
two in some way shape or form?
Speaker 2 (28:56):
It's a really, really great point.
Michael and our early adoptersof Clip were actually investors
that like to combine K-Web withClip.
And let me explain why.
If you own K-Web by itself,you're making a bet on China,
and it's an aggressive betbecause you want to benefit
fully from the performance ofthese companies, their earnings
potential, their inexpensivevaluations and the lack of love
(29:20):
that China has gotten over thelast couple of years.
So the underweights that manyinvestors, including
institutional investors, havehave.
What CLIP does is CLIP reducesvolatility.
It dampens some of that bytrading the upside in exchange
for a relatively high level ofmonthly option income.
(29:43):
So the volatility of CLIP tendsto be about half, has been
about half that of KWeb, andtherefore the drawdowns that
Clip has experienced have tendedto be brief and much more
shallow than the drawdowns ofKWeb.
So many of our early investorssaid this is pretty cool.
(30:04):
I could still make my bet onChina by investing in KWeb, but
I can also layer in Clip at somelevel 20, 30, 50% bring down my
volatility and then also getmonthly income.
So that's pretty interesting.
Now I will mention that in Clipwe cap the monthly income at 2%.
(30:28):
So even though we're earningbetween 4% and 5%.
We put a cap on it at 2%.
That's very much in line withwhat a lot of folks do in the
marketplace.
Some put a 1% cap in.
So we tend to pay out 2xmonthly income to what a lot of
the flagship covered callstrategies do in the marketplace
(30:52):
that are focused on the US.
And the reason it's 2x isbecause we tend to generate
twice as much option income.
But we do cap it at that levelbecause we want to hold back
some of that option income tocreate that buffer, reinvest it
back into K-Web and create thatupside opportunity as well.
Speaker 1 (31:11):
Take me through some scenario analysis.
So, uptrending market for China, how does Clip do?
What should one think about interms of yield potential?
Again understanding there's avolatility aspect obviously to
this Sure.
Absolutely Sideways markets,down market, what's sort of more
ideal Sure?
Speaker 2 (31:31):
sure.
So in a bullish marketenvironment where, let's say,
k-web is up 50% to 100% and thisis true, right, there have been
environments over the last 12or so years where K-Web has had
very strong performance years,certainly even rolling 12 to 24
(31:53):
month periods, where K-Web's up50 to 100%, in a bullish market
like that, clip is not going tokeep up with K-Web.
Right, you are necessarilyselling back, writing those
covered calls and giving up someof that upside.
But those are the types ofyears that you're earning, you
know, 20 plus percent returns.
You're earning the incomethat's being paid out every
(32:17):
month.
That 2% is translating intoreturns because you have few or
invariant drawdowns that don'treduce your returns.
So that's a decent outcome In abear market environment which,
by the way, is something similarto what we've had for the last
couple of years.
(32:38):
Since we've launched Clip,clip's total returns have been
right around 8% to 9%.
That's what we've achievedannualized.
So when you've had a lot ofdownside volatility achieved
annualized.
So when you've had a lot ofdownside volatility, that's the
type of return that we'veproduced.
And we've had prettysignificant drawdowns over the
last couple of years with K-Web.
So that's another scenario.
(33:00):
And then there's something inbetween, something between the
bull case, which is close towhat we're paying out, and the
bear case, which is somethingsimilar what we're paying out
and the bear case, which issomething similar to what we've
experienced over the last coupleof years.
But I think that the point tomake here is that CLIP is just
less volatile.
That option income produces acushion on the downside and
(33:24):
really allows people to tailor aportfolio.
Just think about that 50-50example.
If you go 50% K-Web, 50% CLIB,you now have 1% option income
that's being paid out everymonth.
That's creating an attractivedistributed income for you but
at the same time, giving youopportunity to benefit from what
(33:47):
could be a very differentmarket environment over the next
five years than the one we'veseen over the last five.
Speaker 1 (33:53):
I'm sure you talked to a lot of asset allocators and
financial advisors.
What do you typically hear orsee in terms of how much of a
portfolio goes into Chinabroadly, and then maybe more
specifically, something likeclip Sure, absolutely.
Speaker 2 (34:12):
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 marketopportunity, emerging markets
represent about 15% to 20% ofthe investable opportunity
(34:36):
globally and we think between40% and 50% of that should be in
China.
So our recommendation is thatwithin your equity portfolio,
you should have 5% to 10% of itdedicated to China, not getting
it through your emerging marketsbucket.
But we think a better way tobuild out that portfolio is to
(34:58):
invest in emerging markets,ex-china and then having your
China sleep.
Be explicit have it be astandalone and use strategies
like K-Web and KBA to build itout.
Now, if you're just going to doit in a thematic way in other
words, rather than owning coreChina, which tends to be heavily
(35:22):
represented by not just nameslike in K-Web, but also a lot of
the mainland Chinese namesthey're called the A-shares If
you're going to do it just withthematic approaches, we have a
lot of ETFs at GrainShares thatyou can put together to build it
out.
So, not just China Internet.
We have China Healthcare, chinaCleantech and many, many more.
(35:44):
We actually have over 30 ETFslisted in US exchanges and also
some around the world.
But, to answer your specificquestion, if you're going to go
one layer down, so if you'regoing to then take your China
exposure, put about half of thatinto KWEP, so take, call it 5%
(36:07):
KWEP, so take, call it 5% inK-Web.
You can then decide do I want tosplit that up, depending on my
risk capacity, between K-Web andClip?
So maybe 2.5%, maybe as high as5% in Clip, but those are the
types of numbers that we wouldexpect within an equity
portfolio, unless you have amuch stronger view.
(36:29):
You want to take a directionalbet, you want to benefit from
some of the changes from history, but those are kind of the
levels that we're seeing orthink are appropriate.
What I will tell you, michael,is that many clients right now
have very little invested inChina, some as little as 2% or
(36:51):
3%, even knowing that the numbershould 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 thelast, certainly not this year
and not even over the last 12months.
So investors are starting tounderstand this dynamic and
(37:15):
starting to understand that whatwas a source of outperformance
isn't anymore and can actuallyhurt your portfolio, and we're
starting to see investorsclosing those underweights.
Speaker 1 (37:26):
You used the word investor Between K-Web and Clip.
Are there more investors inClip and more traders in K-Web,
just given the nature of theyield and the volatility, at
least on the downside, beingpushed into your point about
that options income.
Speaker 2 (37:45):
It's an excellent observation.
It really is.
Because K-Web is so large andhas so much liquidity, we do see
traders, including well-knownhedge funds, at times taking
meaningful stakes in K-Web andtrading in and out of it.
So we expect that to happen.
Just because K-Web is amulti-billion dollar ETF, it has
(38:11):
tremendous liquidity and it hasan options market that you can
tack on with it.
So if you're a verysophisticated hedge fund or a
sophisticated institutionalinvestor, you could really
tailor your bets fund or asophisticated institutional
investor, you could reallytailor your bets, which lends
itself to shorter time horizons.
Clip, as we discussed, is morein the less volatile, more
(38:34):
income producing space andtherefore we would expect
investors in CLIP to hold ontoit longer.
So many of the clients we speakwith about clip are in the
wealth management space theirfinancial advisors, um, and
increasingly some institutionsjust given the attractive option
, income characteristics, um,but investors that are not
(38:55):
looking to trade in and out ofit because, quite frankly, it
takes a lot of the, the risk outof the equation.
But at the same time this issomething that I should have
mentioned right away K-Web, whenit has a drawdown, when it has
market stress, it happens at acompletely different time
(39:17):
usually than when the USexperiences market stress or
drawdowns.
So much like blending US stocksand international stocks helps
with diversification.
Blending CLIP with US-basedstrategies also helps with
diversification and that's areally important point.
(39:38):
The very things that we're usedto dealing with for stock
strategies also apply to coveredcall strategies.
You could blend aninternational covered call
strategy like Clip with yourUS-based covered call strategy
and achieve superior outcomes.
So we think that's reallyimportant to emphasize here, and
one of the advents of astrategy like Clip how should we
(40:01):
think about diversifyingagainst other cover call
strategies?
Speaker 1 (40:04):
Is it the same sort of thought process as while
you're diversifying China withthe US, or are you looking at it
from the standpoint of theyield and volatility dynamics
are different for a clip versuson a cover call on US markets.
Speaker 2 (40:19):
Yeah, so correlations translate over.
So, just like US stocks andChina 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 smallcap stocks they have a
(40:42):
correlation that's probablyclose 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.
If you think about US stocks andglobal stocks outside the US,
the correlations are like 0.8,so a little bit lower.
And if you compare US stockswith China stocks, the
(41:03):
correlations drop all the waydown to 0.4, which tells you
that the returns are on adifferent cycle and that's
because the economies are on adifferent cycle and the markets
are quite different, so forthand so on.
So you should really thinkabout the ability to reduce risk
as being quite strong combiningUS and China stocks, us and
(41:30):
China covered calls.
But the other added benefit myopinion is that some
international covered callstrategies like CLIP do have
that higher option incomeopportunity because they do tend
to be more volatile.
Just like international stockstend to be a bit more volatile
than US stocks, internationalcovered call strategies like
(41:53):
Clip are more volatile than UScovered call strategies, but
you're compensated for thatthrough higher option income.
Speaker 1 (42:01):
What's the pushback?
I like the idea.
I think it makes sense ingeneral right to have a cover
call, especially on a marketlike China, and the yield is
attractive and a lot of benefitsthere.
Speaker 2 (42:16):
But what pushback do you typically hear?
Associate the China coveredcall strategy with China not
recognizing that you arechanging the characteristics of
the strategy by writing options.
So it's really sentiment and Ithink it has to do more with a
(42:38):
backward looking view on it asopposed 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 inthe higher option income that
comes with it, then maybe theinternational version is not for
you and you're okay havingsomething that's in the 1% a
(43:02):
month range in terms of optionincome.
But I think, given thecorrelation benefits, the option
income benefits, there reallyaren't many pushbacks that we've
encountered.
Speaker 1 (43:16):
Jonathan.
For those who want to learnmore about Clip, talk about
where they can get someinformation and also maybe just
talk briefly about some of theother products that Craneshares
offers.
Sure.
Speaker 2 (43:23):
Absolutely.
So everything we've talkedabout because these are ETFs
they're all available atwwwcranesharescom that's
CraneShares with a K, and Ishould also mention that a great
resource for people that wantto learn more about China or
stay up to date on China is tovisit our daily blog that's
(43:46):
written by our CIO, brennanAhern, and that's at
wwwchinalastnightcom.
So this gives you morehigh-frequency information about
performance earnings.
Right now, we're in earningsseason and there's a lot of
information that's beingpresented around China, but I
would emphasize that we are aspecialist in the China space
(44:07):
and we emphasize thematicinvesting.
So our goal is to help ourclients build better portfolios,
and we don't necessarily thinkyou need to just do the basic
thing.
We think that there are ways tocombine many of our ETFs
whether they're in the Chinasegment or in the climate
segment or even some of thethings that we do with liquid
(44:28):
alternatives to just build moredurable strategies.
And this has been a hardmessage to provide over the last
10 years, where all you reallyhad to do is invest in the S&P
500, maybe some high yield bonds, and you look like a genius.
Well, when markets arecooperating, everybody looks
like a genius.
We're now entering into a stagewhere having discerning ideas
(44:50):
and discerning views on marketsare really important, which is
where, michael, I think thecontent that you produce and the
information that you provide isextraordinarily valuable.
Speaker 1 (45:00):
And I certainly appreciate that Everybody that
watches.
Please learn more about Clip atthe Crenshaw's website.
I think it's very educational,very interesting.
And also check out theCraneshares Substack at
cranesharessubstackcom.
Some good content there as well.
Jonathan, I appreciate the timehere and have a long weekend
here.
All right you as well.
Take care, mike.
Cheers everybody Over and out,bye-bye.
What is a covered call strategy?
Speaker 2 (00:01):
So a covered call strategy is?
It just means that you're goingto buy a stock.
So usually let's say awell-known name Apple, google,
what have you?
And then you sell a call manytimes at the money.
Speaker 1 (00:16):
Take me through sort of why it is that we've seen so
much interest in this type ofapproach.
Speaker 2 (00:21):
The trend has been pretty crazy, I have to say, and
I think it has to do with a lotof things.
We talked about the advent ofcovered calls being a great way
to do something in a stockportfolio when you're not
certain about the direction andto generate income option income
that could be paid out monthly.
Speaker 1 (00:43):
My name is Michael Guy, a publisher of the Lead Lag
Report.
Again, this is a sponsorconversation by Craneshares.
We're going to talk about oneof their products in particular
that has held a run and it'sactually an interesting strategy
in terms of what's behind it.
Here we've got JonathanSchellen.
So, jonathan, first time youand I are chatting we've been
joking a little bit before goinglive here, but introduce
yourself to the audience to me.
(01:03):
We're going live here, butintroduce yourself to the
audience to me.
Who are you?
What's your background?
What have you done throughoutyour career?
What are you doing atCraneShares?
Speaker 2 (01:07):
Sure, absolutely, michael.
Thanks for having me on andthank you to everyone viewing
this who decided to join us here.
So a little bit about myself.
I'm the chief operating officerat CraneShares and have spent
many decades in the investmentindustry.
I've been at Crane for about 10years as the COO and I do
(01:28):
manage some of the ETFs that wehave here, and I've spent time
at large organizations managingmoney as well.
So I have a lengthy backgroundin finance, in asset management,
and I'm really excited to behere today talking to you about
covered call strategies andthings like.
Speaker 1 (01:49):
CLIP, all right.
So let's get right into it andlet's go very bare bones.
Basic, first and foremost,because you hear a lot about
covered call strategies andobviously there's a tremendous
amount of demand for these typesof vehicles and employees that
overlay.
What is a covered call strategy?
Speaker 2 (02:06):
Sure.
So a covered call strategy issomething that's not
particularly new.
It's been around for a longtime.
It just means that you're goingto buy a stock.
So usually let's say awell-known name Apple, google,
what have you?
And then you sell a call manytimes at the money.
So meaning, if Google istrading at X, you're going to
(02:31):
sell a call at X and that allowsyou 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 stockappreciates, you're not going to
get that upside because you'vegiven it away in exchange for
(02:51):
that premium.
So the way I think about it isif you own Apple stock and you
decide well, you know what it'sin a volatile trading range,
it's not going to keep going upthe way it used to.
Trading range, it's not goingto keep going up the way it used
to.
Covered call strategies areused to do something with that
security over a period of timewhen you think it's just going
to be range bound.
(03:12):
And so what's happened is, overtime, etf firms have been very
innovative and said well, youreally don't have to do this on
your own and you certainly don'thave to do it with a single
stock.
So the early ETFs that builtcovered call strategies focused
(03:33):
on writing calls on the entireS&P 500 or the NASDAQ, and you
know we can talk about what thatmeans and what that does to
your potential outcomes.
Speaker 1 (03:44):
Okay.
Now, there are nuances to this,because a lot of it also is
dependent upon what term you'reusing.
As far as the selling of theoption, what strike liquidity of
the options themselves in themarket?
Talk me through some of theseinteresting characteristics when
it comes to putting together aninsightful approach.
Speaker 2 (04:03):
Sure.
So if you're writing a coveredcall option, it is really
important to identify over whatperiod of time or what tenor of
the option you're going to beselling.
In our case, and we'll get moreinto this we tend to focus on
the 30 to 35 day range forwriting calls.
For the types of options thatwe write, that tends to be the
(04:24):
sweet spot and allows us togenerate option income that's in
somewhere in the three to 5%range per month, basically.
But every investor is a littlebit different and you can write
a longer call option.
Many securities have calloptions that go out to a full
year, but that also means thatyou're trading upside for a full
(04:47):
year in exchange for thatincome.
So that duration or tenor ofthe option is very important.
And the strike price is alsoreally important money, which
means you're writing it atpretty much the price where the
stock is today.
That means you're giving up allof the upside in exchange for
(05:09):
more income and if you write anoption, that's out of the money.
So let's say that if a stock istrading at $100, you write the
option at $110, that means thatyou still have $10 of upside in
the stock, but the income thatyou're going to generate for
writing an out-of-the-moneyoption is going to be lower than
(05:32):
the income that you wouldgenerate from an at-the-money
option.
Speaker 1 (05:36):
So I mentioned there's been a lot of demand for
these types of funds that havea cover call overlay to them.
Take me through sort of why itis that we've seen so much
interest in this type ofapproach.
Speaker 2 (05:48):
The trend has been pretty crazy, I have to say.
If you look back over the lastdecade.
It's been hyperbolic,particularly post 2020, 2021.
And I think it has to do with alot of things.
You know, we talked about theadvent of covered calls being a
great way to do something in astock portfolio when you're not
(06:12):
certain about the direction, andto generate income option
income that could be paid outmonthly.
So what happened is we saw,over the last few years in
particular, the explosion ofcovered call AUM.
So assets under managementthey're now north of a hundred
(06:34):
billion in this derivativeincome space and there are more
than a hundred covered call ETFsthat are available.
So now, mind you, there are acouple of big players, some
leading firms and some leadingmethodologies, mostly focused on
domestic equities, us stocks inparticular, and then tech as
(06:59):
well.
Those tend to be the dominantareas, but there are growing
trends in things like singlestock covered call ETFs, which
is interesting, right, becausethe advent of ETFs is to create
a basket, but there seems to bea trend, in some ways, to go to
single stock covered call.
Writing, which was really howthe strategy was introduced a
(07:23):
long time ago.
Which was really how thestrategy was introduced a long
time ago, and then now there'salso a trend towards
international covered calls, andthat's where we excel.
I should have mentioned earlyon that GrainShares as a firm is
really focused on China,emerging markets and alternative
investing, so we give uniqueaccess to strategies around the
(07:45):
globe that tend to be quitedifferent than what you would
traditionally own in a portfolio.
So a lot of individuals owntraditional stocks and
traditional bonds.
Crane Shares is very focused ongiving you extended asset
categories that tend to have lowcorrelation to things that you
may have owned in the past.
So CLIP, our internationalcovered call strategy, really
(08:09):
symbolizes that very thing.
It's very much in line withwhat we do at Crane and we're
excited about it.
Speaker 1 (08:16):
I don't want to expand on that, but I want to go
back to this demand and kind ofwhere it's coming from.
I get the sense that certainlyamong the retail since you
mentioned even the single stockside of things a lot of this
demand for income comes fromconcerns around inflation,
obviously right, but on top ofthat, I think, also a distrust
of bonds.
You know, increasingly you'restarting to see more and more
(08:39):
wanting to have alternativesources of yields.
Yes, right Of bonds, right.
So let's talk about that,because that's an interesting
sort of dynamic and trend and itdoesn't seem like it's over.
Even as we're chatting here onMay 21st, I mean, yields are
again rising.
Speaker 2 (08:54):
It's really it's such a good point.
This trend accelerated after2022, right, so think about when
the Fed started to hike ratesagain.
We saw more appetite, moregrowth in yield enhancing
strategies, and so we believethat the appetite for yields
beyond traditional ways ofgetting exposure to yield a la
(09:18):
government bonds, high yieldbonds, corporate bonds it's
really strong.
The appetite is very strong andI'd say it's interesting too,
because more and more investorsare building.
Clients that we engage with areactually building yield-centric
portfolios.
Right, it used to be that you'dhave a 60-40, you'd have your
(09:39):
stock and bond mix, but now werun across advisors that are
building portfolios that arededicated to generating income,
and those portfolios may havedividend paying stocks,
different types of credit, highyield bonds, so forth and so on.
Emerging market debt andincreasingly, derivative income
(10:02):
strategies like covered callstrategies are part of that mix.
So I think this trend continues.
We're seeing it in the assetnumbers, we're seeing it in the
number of ETFs in themarketplace, and we have a
number of examples where wethink it's actually pretty smart
to mix these strategiestogether within an income
(10:24):
approach.
Speaker 1 (10:26):
Okay, so let's on the international side.
Obviously on the China andinternational markets, this year
in particular, have done quitea bit better than US markets,
and you and I both know it'sbeen arguably a horrendous cycle
for anything outside of USinvesting.
Most things outside of the USborders have not just
underperformed, butunderperformed meaningfully.
(10:46):
Maybe there's a shift starting.
I myself have made the argumentmany times that I would bet
that the next four years China'smarkets outperform the US
markets, and that has nothing todo with Trump and everything to
do with starting valuation.
Yep, but first let's make thecase for international investing
and then we'll get into thecover call clip sign if you
(11:27):
invested in US stocks alone, youwon.
Speaker 2 (11:28):
You systematically outperformed most equities
around the world and if you lookat, say, the US markets versus
emerging markets, yououtperformed by an average of
10% to 11% a year over the last12 or so years.
So for a lot of investors,either because you're new or
because you think this is a newparadigm, you are led to believe
(11:49):
that US investing orconcentrating your equity
investments to the US is thesuperior approach.
But what people forget is ifyou go to the 12-year period
before that, starting in theearly 2000s and going to around
2011,.
2012, you will have seen themirror image.
(12:10):
You will have seen emergingmarkets systematically
outperforming US equities with ahigh consistency and an
outperformance of around 10% to11%.
So literally the mirror imageof what we've seen over the last
11 to 12 years and the tell.
The thing that you can look atto help understand how or why
(12:35):
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 outperformingmeaningfully.
And in the last 10 to 12 yearsthe dollar has been
strengthening to the tune ofabout call it, three, three and
(12:58):
a half percent a year, so 40%cumulatively.
But that trend is changing andit's rapidly changing, in part
because we believe that Trump ismaking diversification great
again and all the things thatworked over the last decade.
We're starting to see a shift, achange.
Currencies are off eight to 10percent this year if you look at
(13:20):
the dollar on a trade weightedbasis.
International, therefore, isoutperforming meaningfully this
year.
China is outperforming.
Our flagship ETF, k-web, isoutperforming the S&P by 15%
year to date.
Our funds up about 16.5% andthe S&P is up about a percent
(13:42):
and change maybe flat now if weincorporate today.
The S&P is up about a percentchange maybe flat now if we
incorporate today and the10-year.
Look what's happening withbonds.
This is really unusual.
So all of a sudden, the thingsthat didn't matter over the last
decade, namely diversification,are really starting to matter
again and it's forcing everybodyto relook at how they're
(14:03):
managing their portfolios.
Speaker 1 (14:05):
Okay, let's talk specifically about China first,
around the view from the greenshare side of things, around
tariffs and how negotiationscould play out.
Again, I've also argued thatthe irony of tariffs is that it
may actually be more beneficialfor China than the US because
it's going to maybe force somestimulus to get some domestic
consumption to pick up, sothere's less reliance on the US.
(14:26):
But talk us through a littlebit around sort of the thesis
for China from a longer termperspective and then we're going
to bring it to investment ideas.
Sure.
Speaker 2 (14:35):
So, if you think about what's been happening, the
Trump administration, withLiberation Day, has brought
about tariffs across a number ofcountries, but was really quite
aggressive with China,providing tariffs that were
about 145% in the announcements,and then, of course, china was
(14:57):
reciprocating and placingtariffs on US goods of upwards
of 125% and this was April.
Then, a month later, so earlierthis month, we had a
breakthrough where there was adecision to really work this out
and negotiate a 90-day periodover a 90-day period, whereby
(15:19):
tariffs in this interim periodwould drop down to 10%.
So right now we're in thisquiet negotiating period.
The market has had a sigh ofrelief and if you watch even US
equity markets in particular,you will have seen that, post
that 90-day announcement, thevolatility dropped.
So it was measured by the VIX.
This is the volatility in theUS markets, and the US markets
(15:41):
started to regain their climband the US markets started to
regain their climb, thetrajectory that they were on
earlier in the year.
So, clearly, amongst all thedifferent things that are
happening in the world and allthe different treaties and
things that are being worked on,the one that was most impactful
for the US markets was actuallythe conversation with China,
(16:03):
and this can't be a surprise.
The US is the world's largeststock market, the world's
largest economy, the world'slargest bond market, and China
is the world's second largesteconomy, the world's second
largest stock market, theworld's second largest bond
market.
So these two countries arereally important on a global
scale, as is their relationship,and the crane view is that
(16:26):
talking about trade and deficitsunderstates the value of the
relationship, and I'll explainwhy.
So we have a traded goodsdeficit with China that's just
under 300 billion, which meansthat we buy more goods from them
than they buy from us, to thetune of about 300 billion.
(16:49):
And I think that the actualnumbers are we buy about $440
billion worth of stuff fromChina and they buy 100, I have
the number here somewhere.
Call it $145 billion worth ofgoods from us.
Now, that doesn't includeservices.
We actually have a servicesurplus with China.
(17:12):
So the number that we have adeficit of is really below $300
billion.
It's not terribly huge, and Isay that because, consider this
U companies in the S&P earn overa trillion dollars of revenue
in China.
That is not captured in thosetraded goods or services numbers
(17:33):
.
In other words, think aboutcompanies like Apple and
Starbucks and GM and Tesla thetop companies in the S&P are
making a trillion dollars inChina.
China is a huge market for themand it's a big part of their
growth.
So when we sit here and wesaber rattle over a couple of
(17:56):
hundred billion dollars in tradeone way or the other, that
really understates theimportance of the economic
relationship between these twocountries, and that's why we
believe that cooler heads willprevail.
This has been our view for sometime.
We know that the people thatare in charge do understand this
(18:19):
from both sides and they wantto have a good economic outcome
for both countries Because,ironically, the things that we
need and the things that Chinaneed are quite complementary,
and so we can help each otherwith some of our local
challenges, and I'm happy toshare more about that.
(18:39):
The final point I'd make is thatover the last few years,
because of some of thegeopolitical tensions and just
the strength of the Chineseeconomy, chinese stocks have
become super cheap.
Pe ratios for China tech are,call it, mid-single digits, so
(18:59):
around 15, 12 to 15, dependingon how you're looking at it, and
then growth remains quite high.
So earnings growth in China isquite high.
So to your point earlier,michael, the fundamentals are
quite compelling in China,whereas in the rest of the
market, the equity markets, manyof them, including in the US,
(19:21):
are near record highs, not justin index levels but also in
terms of their fundamentals.
Speaker 1 (19:25):
Let's talk about ways of accessing China's markets.
Obviously, CraneShares is verywell known for K-Web.
Let's talk about that fund.
And then let's talk about howClip is an interesting spin on
it.
Sure, absolutely.
Speaker 2 (19:39):
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 arehappening in China.
It focuses on China's internetand e-commerce segment.
(19:59):
People think about China as amanufacturing country, which of
course it is, but China has 1.4billion people that are very
tech savvy and rely on the techindustry to do a lot of
consumption.
So we may have firms in the USlike Amazon that we rely on, and
(20:24):
other firms like Google.
So, whether it's for shopping,communication, well, china has
firms like Alibaba and Tencent.
So for many of the USequivalents that we rely on as
US consumers, china has theirown equivalents that are relied
upon by Chinese consumers.
So the KWeb ETF bundles 30 ofthese leading names in the China
(20:49):
internet and e-commerce space.
So names like Alibaba and Baiduand Tripcom and Tencent and JD
and Pinduoduo.
So these may not be householdnames in the US, but they are
100% household names in China,and these are companies that are
also at the center of a lot ofthe innovation that's happening
(21:09):
technologically.
One of the reasons that K-Webis performing so well this year
is because, when DeepSeek wasannounced, it became very clear
that China is very much in theAI race no-transcript.
Speaker 1 (21:59):
And flows have been remarkable both in and out, as
sentiment has waned and gone infavor of China over the years.
Yeah, now let's talk about howCLIP plays into it.
First of all, obviously youidentify correctly that there's
this mega trend towards covercall strategies.
Most people think about covercall strategies for US funds.
This is different.
Speaker 2 (22:21):
It is.
It is.
So one of the things that'samazing and what's led to the
development of CLIP, is the factthat KWeb has an extraordinary
options market that hasdeveloped around it.
So when you launch an ETF, manytimes, once the ETF grows to
scale say billions of dollars inassets and has a wide following
(22:42):
, like KWeb does an optionsmarket will develop.
So you'll start to see calloptions and put options and
different tenors and so on, andthat's really exciting because
if you're an ETF issuer, like weare, you then have additional
tools to build custom strategies.
And so what we realized instudying the covered call space
(23:06):
and we did this for about a yearbefore we launched Clip back in
2023, we started to realizethat there really weren't any
covered calls that were focusedon a basket of securities
outside of the US.
The other thing I shouldmention is that we also realized
that by creating a covered callstrategy around K-Web, our
(23:31):
flagship ETF, by using thosevery options that I spoke about,
that we should be able togenerate higher levels of option
income than some of theflagship 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 concentratedbasket of stocks, and those
(23:56):
stocks tend to be more volatilein and of themselves.
So what happens is, when youwrite call options on a more
volatile basket, you generatehigher levels of option income,
and so the option income thatwe've been able to generate and
clip over the last two yearsthat we've been managing it has
(24:18):
been somewhere in the three to5% per month range, which is
really attractive.
Speaker 1 (24:24):
I've got to assume you have to sort of wait for a
certain moment in time to reallythink about launching a
strategy like this, meaningyou've got to have the liquidity
, you've got to have the optionsmarket being deep when it comes
to $7 billion range.
Speaker 2 (24:35):
So the notional value of options traded in or owned
in KWeb are roughly the samesize as the ETF itself.
(24:59):
That's really significant andthat may not help.
But think about it in arelative way.
Across all 4,000 plus ETFs thatare out there, kweb is the 14th
most optionable ETF.
So it's in that top universe ofETFs with option liquidity.
(25:20):
Think about things like the S&Pand the NASDAQ and so forth and
so on.
So if you're familiar with SPYor QQQ and those of course are
leading optionable ETFs but KWebis among those top most liquid
optionable ETFs, which meansthat it has a really wide
(25:42):
following, not just byindividual investors and wealth
managers, but also institutionalinvestors, hedge funds and
foundations, endowments, familyoffices really the full spectrum
of investor types are able togain exposure to K-Web either
directly through the ETF orthrough the options market.
Speaker 1 (26:03):
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 fixedincome, obviously.
Speaker 2 (26:14):
instrument it's not, and so, unlike, say, a fixed
income instrument where theyield that you generate is
entirely driven by what happensto the yield curve, with covered
call strategies there's almosta linear relationship between
something called impliedvolatility and then the option
(26:35):
income that you're able togenerate.
In other words, when impliedvolatility is high, then option
income goes up.
When implied volatility goesdown, then option income goes
down.
A good way, if folks listeningin are familiar with the VIX,
(26:56):
the VIX is the impliedvolatility for the S&P 500.
That's what the VIX actually is.
So as the VIX is moving up anddown, the amount of income you
could generate from the S&P isalso moving up and down linearly
.
So you could think about itthat way, right?
So when the VIX goes from, say,a level of 15 to 30, then you
(27:21):
would expect being able to earntwice as much on your covered
call options in an S&P product.
The same thing holds for KWeb,or Clip rather, that writes
covered calls on KWeb, and we'veseen this episodically We'll
see volatility spike, and thatgives us better opportunities.
(27:44):
Just in the month of April, wesaw volatility spiking because
of some of the tariffsannouncements and some of the
rhetoric, and we were able towrite options for the month of
April at a level of about 6% forthe month, which is more
attractive than our long-termnumbers, which tend to be
somewhere in the 4%, 3.5% to 4%range.
(28:07):
So that's actually aninteresting dynamic right, when
volatility spikes, meaningthere's something happening in
the markets, you actually havethe ability to generate slightly
higher yields, or I shouldn'tsay yields, but slightly higher
option income.
Now, that said, those periodsof heightened volatility tend to
(28:28):
also be associated withdepressed returns, so the two
things tend to balance eachother out.
Speaker 1 (28:35):
Is it an either or type of situation, meaning if
you're going to position toChina using a China fund to be
in clip or K-Web, or is theresomething maybe to blending the
two in some way shape or form?
Speaker 2 (28:56):
It's a really, really great point.
Michael and our early adoptersof Clip were actually investors
that like to combine K-Web withClip.
And let me explain why.
If you own K-Web by itself,you're making a bet on China,
and it's an aggressive betbecause you want to benefit
fully from the performance ofthese companies, their earnings
potential, their inexpensivevaluations and the lack of love
(29:20):
that China has gotten over thelast couple of years.
So the underweights that manyinvestors, including
institutional investors, havehave.
What CLIP does is CLIP reducesvolatility.
It dampens some of that bytrading the upside in exchange
for a relatively high level ofmonthly option income.
(29:43):
So the volatility of CLIP tendsto be about half, has been
about half that of KWeb, andtherefore the drawdowns that
Clip has experienced have tendedto be brief and much more
shallow than the drawdowns ofKWeb.
So many of our early investorssaid this is pretty cool.
(30:04):
I could still make my bet onChina by investing in KWeb, but
I can also layer in Clip at somelevel 20, 30, 50% bring down my
volatility and then also getmonthly income.
So that's pretty interesting.
Now I will mention that in Clipwe cap the monthly income at 2%.
(30:28):
So even though we're earningbetween 4% and 5%.
We put a cap on it at 2%.
That's very much in line withwhat a lot of folks do in the
marketplace.
Some put a 1% cap in.
So we tend to pay out 2xmonthly income to what a lot of
the flagship covered callstrategies do in the marketplace
(30:52):
that are focused on the US.
And the reason it's 2x isbecause we tend to generate
twice as much option income.
But we do cap it at that levelbecause we want to hold back
some of that option income tocreate that buffer, reinvest it
back into K-Web and create thatupside opportunity as well.
Speaker 1 (31:11):
Take me through some scenario analysis.
So, uptrending market for China, how does Clip do?
What should one think about interms of yield potential?
Again understanding there's avolatility aspect obviously to
this Sure.
Absolutely Sideways markets,down market, what's sort of more
ideal Sure?
Speaker 2 (31:31):
sure.
So in a bullish marketenvironment where, let's say,
k-web is up 50% to 100% and thisis true, right, there have been
environments over the last 12or so years where K-Web has had
very strong performance years,certainly even rolling 12 to 24
(31:53):
month periods, where K-Web's up50 to 100%, in a bullish market
like that, clip is not going tokeep up with K-Web.
Right, you are necessarilyselling back, writing those
covered calls and giving up someof that upside.
But those are the types ofyears that you're earning, you
know, 20 plus percent returns.
You're earning the incomethat's being paid out every
(32:17):
month.
That 2% is translating intoreturns because you have few or
invariant drawdowns that don'treduce your returns.
So that's a decent outcome In abear market environment which,
by the way, is something similarto what we've had for the last
couple of years.
(32:38):
Since we've launched Clip,clip's total returns have been
right around 8% to 9%.
That's what we've achievedannualized.
So when you've had a lot ofdownside volatility achieved
annualized.
So when you've had a lot ofdownside volatility, that's the
type of return that we'veproduced.
And we've had prettysignificant drawdowns over the
last couple of years with K-Web.
So that's another scenario.
(33:00):
And then there's something inbetween, something between the
bull case, which is close towhat we're paying out, and the
bear case, which is somethingsimilar what we're paying out
and the bear case, which issomething similar to what we've
experienced over the last coupleof years.
But I think that the point tomake here is that CLIP is just
less volatile.
That option income produces acushion on the downside and
(33:24):
really allows people to tailor aportfolio.
Just think about that 50-50example.
If you go 50% K-Web, 50% CLIB,you now have 1% option income
that's being paid out everymonth.
That's creating an attractivedistributed income for you but
at the same time, giving youopportunity to benefit from what
(33:47):
could be a very differentmarket environment over the next
five years than the one we'veseen over the last five.
Speaker 1 (33:53):
I'm sure you talked to a lot of asset allocators and
financial advisors.
What do you typically hear orsee in terms of how much of a
portfolio goes into Chinabroadly, and then maybe more
specifically, something likeclip Sure, absolutely.
Speaker 2 (34:12):
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 marketopportunity, emerging markets
represent about 15% to 20% ofthe investable opportunity
(34:36):
globally and we think between40% and 50% of that should be in
China.
So our recommendation is thatwithin your equity portfolio,
you should have 5% to 10% of itdedicated to China, not getting
it through your emerging marketsbucket.
But we think a better way tobuild out that portfolio is to
(34:58):
invest in emerging markets,ex-china and then having your
China sleep.
Be explicit have it be astandalone and use strategies
like K-Web and KBA to build itout.
Now, if you're just going to doit in a thematic way in other
words, rather than owning coreChina, which tends to be heavily
(35:22):
represented by not just nameslike in K-Web, but also a lot of
the mainland Chinese namesthey're called the A-shares If
you're going to do it just withthematic approaches, we have a
lot of ETFs at GrainShares thatyou can put together to build it
out.
So, not just China Internet.
We have China Healthcare, chinaCleantech and many, many more.
(35:44):
We actually have over 30 ETFslisted in US exchanges and also
some around the world.
But, to answer your specificquestion, if you're going to go
one layer down, so if you'regoing to then take your China
exposure, put about half of thatinto KWEP, so take, call it 5%
(36:07):
KWEP, so take, call it 5% inK-Web.
You can then decide do I want tosplit that up, depending on my
risk capacity, between K-Web andClip?
So maybe 2.5%, maybe as high as5% in Clip, but those are the
types of numbers that we wouldexpect within an equity
portfolio, unless you have amuch stronger view.
(36:29):
You want to take a directionalbet, you want to benefit from
some of the changes from history, but those are kind of the
levels that we're seeing orthink are appropriate.
What I will tell you, michael,is that many clients right now
have very little invested inChina, some as little as 2% or
(36:51):
3%, even knowing that the numbershould 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 thelast, certainly not this year
and not even over the last 12months.
So investors are starting tounderstand this dynamic and
(37:15):
starting to understand that whatwas a source of outperformance
isn't anymore and can actuallyhurt your portfolio, and we're
starting to see investorsclosing those underweights.
Speaker 1 (37:26):
You used the word investor Between K-Web and Clip.
Are there more investors inClip and more traders in K-Web,
just given the nature of theyield and the volatility, at
least on the downside, beingpushed into your point about
that options income.
Speaker 2 (37:45):
It's an excellent observation.
It really is.
Because K-Web is so large andhas so much liquidity, we do see
traders, including well-knownhedge funds, at times taking
meaningful stakes in K-Web andtrading in and out of it.
So we expect that to happen.
Just because K-Web is amulti-billion dollar ETF, it has
(38:11):
tremendous liquidity and it hasan options market that you can
tack on with it.
So if you're a verysophisticated hedge fund or a
sophisticated institutionalinvestor, you could really
tailor your bets fund or asophisticated institutional
investor, you could reallytailor your bets, which lends
itself to shorter time horizons.
Clip, as we discussed, is morein the less volatile, more
(38:34):
income producing space andtherefore we would expect
investors in CLIP to hold ontoit longer.
So many of the clients we speakwith about clip are in the
wealth management space theirfinancial advisors, um, and
increasingly some institutionsjust given the attractive option
, income characteristics, um,but investors that are not
(38:55):
looking to trade in and out ofit because, quite frankly, it
takes a lot of the, the risk outof the equation.
But at the same time this issomething that I should have
mentioned right away K-Web, whenit has a drawdown, when it has
market stress, it happens at acompletely different time
(39:17):
usually than when the USexperiences market stress or
drawdowns.
So much like blending US stocksand international stocks helps
with diversification.
Blending CLIP with US-basedstrategies also helps with
diversification and that's areally important point.
(39:38):
The very things that we're usedto dealing with for stock
strategies also apply to coveredcall strategies.
You could blend aninternational covered call
strategy like Clip with yourUS-based covered call strategy
and achieve superior outcomes.
So we think that's reallyimportant to emphasize here, and
one of the advents of astrategy like Clip how should we
(40:01):
think about diversifyingagainst other cover call
strategies?
Speaker 1 (40:04):
Is it the same sort of thought process as while
you're diversifying China withthe US, or are you looking at it
from the standpoint of theyield and volatility dynamics
are different for a clip versuson a cover call on US markets.
Speaker 2 (40:19):
Yeah, so correlations translate over.
So, just like US stocks andChina 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 smallcap stocks they have a
(40:42):
correlation that's probablyclose 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.
If you think about US stocks andglobal stocks outside the US,
the correlations are like 0.8,so a little bit lower.
And if you compare US stockswith China stocks, the
(41:03):
correlations drop all the waydown to 0.4, which tells you
that the returns are on adifferent cycle and that's
because the economies are on adifferent cycle and the markets
are quite different, so forthand so on.
So you should really thinkabout the ability to reduce risk
as being quite strong combiningUS and China stocks, us and
(41:30):
China covered calls.
But the other added benefit myopinion is that some
international covered callstrategies like CLIP do have
that higher option incomeopportunity because they do tend
to be more volatile.
Just like international stockstend to be a bit more volatile
than US stocks, internationalcovered call strategies like
(41:53):
Clip are more volatile than UScovered call strategies, but
you're compensated for thatthrough higher option income.
Speaker 1 (42:01):
What's the pushback?
I like the idea.
I think it makes sense ingeneral right to have a cover
call, especially on a marketlike China, and the yield is
attractive and a lot of benefitsthere.
Speaker 2 (42:16):
But what pushback do you typically hear?
Associate the China coveredcall strategy with China not
recognizing that you arechanging the characteristics of
the strategy by writing options.
So it's really sentiment and Ithink it has to do more with a
(42:38):
backward looking view on it asopposed 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 inthe higher option income that
comes with it, then maybe theinternational version is not for
you and you're okay havingsomething that's in the 1% a
(43:02):
month range in terms of optionincome.
But I think, given thecorrelation benefits, the option
income benefits, there reallyaren't many pushbacks that we've
encountered.
Speaker 1 (43:16):
Jonathan.
For those who want to learnmore about Clip, talk about
where they can get someinformation and also maybe just
talk briefly about some of theother products that Craneshares
offers.
Sure.
Speaker 2 (43:23):
Absolutely.
So everything we've talkedabout because these are ETFs
they're all available atwwwcranesharescom that's
CraneShares with a K, and Ishould also mention that a great
resource for people that wantto learn more about China or
stay up to date on China is tovisit our daily blog that's
(43:46):
written by our CIO, brennanAhern, and that's at
wwwchinalastnightcom.
So this gives you morehigh-frequency information about
performance earnings.
Right now, we're in earningsseason and there's a lot of
information that's beingpresented around China, but I
would emphasize that we are aspecialist in the China space
(44:07):
and we emphasize thematicinvesting.
So our goal is to help ourclients build better portfolios,
and we don't necessarily thinkyou need to just do the basic
thing.
We think that there are ways tocombine many of our ETFs
whether they're in the Chinasegment or in the climate
segment or even some of thethings that we do with liquid
(44:28):
alternatives to just build moredurable strategies.
And this has been a hardmessage to provide over the last
10 years, where all you reallyhad to do is invest in the S&P
500, maybe some high yield bonds, and you look like a genius.
Well, when markets arecooperating, everybody looks
like a genius.
We're now entering into a stagewhere having discerning ideas
(44:50):
and discerning views on marketsare really important, which is
where, michael, I think thecontent that you produce and the
information that you provide isextraordinarily valuable.
Speaker 1 (45:00):
And I certainly appreciate that Everybody that
watches.
Please learn more about Clip atthe Crenshaw's website.
I think it's very educational,very interesting.
And also check out theCraneshares Substack at
cranesharessubstackcom.
Some good content there as well.
Jonathan, I appreciate the timehere and have a long weekend
here.
All right you as well.
Take care, mike.
Cheers everybody Over and out,bye-bye.
Popular Podcasts
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.
24/7 News: The Latest
The latest news in 4 minutes updated every hour, every day.
Crime Junkie
Does hearing about a true crime case always leave you scouring the internet for the truth behind the story? Dive into your next mystery with Crime Junkie. Every Monday, join your host Ashley Flowers as she unravels all the details of infamous and underreported true crime cases with her best friend Brit Prawat. From cold cases to missing persons and heroes in our community who seek justice, Crime Junkie is your destination for theories and stories you won’t hear anywhere else. Whether you're a seasoned true crime enthusiast or new to the genre, you'll find yourself on the edge of your seat awaiting a new episode every Monday. If you can never get enough true crime... Congratulations, you’ve found your people. Follow to join a community of Crime Junkies! Crime Junkie is presented by audiochuck Media Company.