Covered call strategies continue to gain popularity with investors seeking diversified income strategies. For those investors looking for overlooked income opportunities, the KraneShares China Internet and Covered Call Strategy ETF (KLIP ) generates a substantial distribution rate by capitalizing on China tech sector volatility.
While some investors may hold reservations about investing in China in the current environment, China equities may benefit from ongoing domestic policy support. With many investors currently underweight China, contrarian investors could stand to benefit in 2025. KLIP combines China tech sector exposure with a covered call strategy to generate income on the elevated volatility inherent to the space.
KLIP seeks to provide monthly income through its strategy of writing options on the KraneShares CSI China Internet ETF (KWEB ). The fund invests in China’s largest growth companies within its technology sector, historically a more volatile sector than the U.S. tech sector counterpart.
The fund 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.
KLIP Generates Significant Distribution Rate on China Tech Volatility
KLIP generates a notable distribution rate without capping option income distributions. “The distributions investors in KLIP receive will be aligned with the options income earned by the Fund for the month, minus expenses, and fees, and any required capital gains distributions, which usually occur at end of the year,” explained KraneShares in a FAQ.
Currently, KLIP offers a distribution rate of 58.93% as of 12/10/24. Distribution rate takes the most recent distribution and annualizes it before dividing it by the fund’s recent NAV.
The income earned from the options strategy helps offset KWEB losses during periods of declines. This means that during market drawdowns, KLIP may outperform KWEB. During relatively flat markets, KLIP’s options premiums contribute to the fund’s expectations for stable performance. In periods of strong price appreciation, KLIP’s momentum is capped at the strike prices, and KWEB will outperform.
KWEB is benchmarked to the CSI Overseas China Internet Index, which tracks publicly traded China-based internet companies. Investors may use KLIP alongside KWEB in a portfolio or as a stand-alone play for diversified income.
KLIP has an expense ratio of 0.93%.
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