China stocks soared on a number of new supportive policy announcements at the end of last month and beginning of October. However, ongoing policy announcements have failed to wow investors in recent weeks, leading to muted performance and increased volatility.
The most recent China government agency announcements regarding the real estate sector failed to move the needle meaningfully for investors. For now, there’s an atmosphere of wait-and-see as investors await the next National People’s Congress (NPC) session, currently unscheduled, for more meaningful guidance.
“Based on the light volumes, small pullback, and lack of significant selling, markets have realized that implementation details won’t come until the upcoming NPC meeting,” explained Brendan Ahern, CIO of KraneShares on the China Last Night blog.
Putting China Tech Stock Volatility to Work for Income
As investors await further insight into the government’s economic stance, the potential for volatility remains heightened. It leaves the KraneShares China Internet and Covered Call Strategy ETF (KLIP ) in a position to potentially benefit from already volatile assets — China tech stocks.
The fund offers a play on volatility while offering a diversified income stream for portfolios. Currently, KLIP offers a distribution rate of 38.91% as of Oct. 16, 2024. Distribution rate takes the most recent distribution and annualizes it before dividing it by the fund’s recent NAV.
KLIP seeks to provide monthly income through its strategy of writing options on the KraneShares CSI China Internet ETF (KWEB ). KWEB invests in China’s largest growth companies within its technology sector, historically a more volatile sector than the U.S. tech sector counterpart.
See also: KWEB Benefits as China Stocks and US ADRs Diverge
KLIP writes covered calls on KWEB and, because of the increased volatility, can potentially offer a higher yield than investing in tech in the U.S. or other technology sectors globally. A covered call entails holding the underlying security while writing calls on that security. This earns a premium from selling the covered call that can generate income for the fund.
The ETF is benchmarked to the CSI Overseas China Internet Index, which tracks publicly traded China-based internet companies. KLIP can be used alongside KWEB in a portfolio or as a standalone play for diversified income.
KLIP has an expense ratio of 0.93%.
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