KraneShares has launched a new ETF in the US delivering a covered call strategy on its flagship fund that targets Chinese internet and internet-related companies.
Jonathan Krane, CEO of KraneShares.
The KraneShares China Internet & Covered Call Strategy ETF (KLIP US) has been listed on NYSE Arca.
The covered call, or buy-write, strategy is enacted on the underlying $7.5 billion KraneShares CSI China Internet ETF (KWEB US), a seasoned fund with a performance track record of more than nine years.
KWEB tracks the CSI Overseas China Internet Index which selects its constituents from a universe of US and Hong Kong-listed stocks of companies with market capitalizations in excess of $2bn and average daily trading volumes of at least $3 million. Eligible firms must be incorporated and operate in mainland China and generate at least 50% of their revenue there.
The index includes companies that develop and market internet software, provide internet services, manufacture home entertainment and educational software, provide retail or commercial services primarily through the internet, or develop and market mobile internet software and services.
Constituents are weighted by market cap subject to an individual security cap of 10%. The largest holdings in the fund are currently Tencent (10.2%), Alibaba (9.4%), Meituan (7.3%), JD.com (6.2%), and Pinduoduo (5.8%).
A covered call is an options strategy whereby an investor holds a long position in an asset and sells or “writes” call options on that same asset in an attempt to generate more income (the additional income from the option’s premium) than the asset would otherwise provide on its own from dividends or other distributions.
In terms of the new ETF. KLIP, the fund writes covered call options on KWEB equal to the full amount of its underlying assets, effectively sacrificing 100% of KWEB’s upside potential in exchange for generating significant income. The written options are ‘FLEX’ options with maturities generally greater than 30 days and strike prices at the prevailing share price of KWEB at the time the options are written.
KLIP makes distributions to investors on a monthly basis.
Investors may wish to combine allocations to both KWEB and KLIP in order to tailor a targeted growth and income strategy that maintains their desired mix of upside potential and stable income.
KLIP comes with an expense ratio of 0.95%, while KWEB costs 0.69%.
Jonathan Krane, CEO of KraneShares, said: “We are thrilled to add a covered call strategy to our suite of China ETFs. By writing covered calls on KWEB, an established ETF with a deep options market, KLIP provides investors the opportunity to generate additional income while potentially reducing volatility in their portfolio. This strategy can be a valuable tool for those looking to enhance their income and manage risk in China-focused investments.”
Chinese internet stocks have experienced significant volatility over the past two years with KWEB’s index crashing some 80% between February 2021 and October 2022. The sector has robustly begun to bounce back though with the index gaining 84.9% between 24 October 2022 and 12 January 2022. The sharp reversal has been attributed to a quick shift in investor sentiment precipitated by China’s abrupt pivot away from zero-Covid policies.
The heightened uncertainty may be beneficial to covered call strategies, as the value of call options typically rises during periods of increased market volatility – over the past five years, KWEB has an annualized volatility of 46.9%, while its volatility over the past year is significantly higher at 74.3%. In comparison, the one and five-year volatilities for the Nasdaq 100 are 32.1% and 26.2%, respectively.