Animal Spirits Podcast - Talk Your Book: Internet Stocks with Income

Episode Date: June 19, 2023

On today's show, Michael and Ben are joined by Jonathan Shelon, COO of KraneShares to discuss internet growth in China, how to get exposure to China, how the KLIP ETF is able to generate high yields, risks involved with covered call strategies, cash flow rebalancing with KWEB, and much more!    Find complete shownotes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation.   Check out the latest in financial blogger fashion at The Compound shop: https://www.idontshop.com   Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Ben Carlson are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits Talk Your Book is brought to you by Crane Shares. Go to craneshares.com slash clip. That's KLIP to learn more about the cranechairs, China Internet, and covered call strategy, which we're going to talking about today. That's craneshares.com slash click. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Redholz wealth management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ridholt's wealth management may maintain positions in the securities discussed in this podcast.

Welcome to Animal Spirits with Michael and Ben. Michael, we've been talking a lot in the last year or so about covered call strategy. I think there was a Wall Street Journal story three or four months ago talking about the money that poured into those types of strategies. I think we've heard from ones on the S&P 500, the NASP. 500, the NASP. NASDAQ 100, maybe some high-quality individual stocks like consumer staples, those sorts of things. You think 2021 was the year of growth, crazy momentum? 2022 was the year of covered call strategies?

I don't know. That might be a stretch. And 2023 is the year of money market funds? Close. Yeah. Could be. But this is marrying growth and covered calls, right? So we've talked to crane shares in the past before.

They have their China Internet strategy, Kwe. that invests in China Internet companies, and that's a very volatile strategy, right? Huge swings in price, big gains, huge losses all over the place. I think you mentioned this to me a couple weeks ago, and you said, check out this new covered call strategy on KWeb. Look at the distribution yield on it. And it was 50 to 60%, right?

Not a typo. 50 to 6. It was something in that range, right? which is crazy and we looked into it and it's basically because these stocks are so volatile and option prices are based on volatility that if you're writing options on these China internet companies right now, those are the kind of, that's the kind of option income that you can earn. Yeah, pretty wild. It's not magic, not rocket science or voodoo. It's pretty linear, the relationship between, again, volatility and option prices. And when you're selling them,

you're on the other side of buying them, right? Duh. So that's where the income comes from. We get into all of that. How is it possible? What are the risks? Of course, anything that distributes that sort of distribution is not risk-free. Probably the opposite. So Jonathan Schellen from Crane Shares explains to us how that is done.

So without any further ado, here is our conversation with Jonathan Schellon. We're joined today by Jonathan Schellon. Jonathan is the chief operating officer at Crane Shares. Welcome to the show. Hey, great. Thanks for having me. We're talking today about KLIP, which is the covered call strategy on the China Internet sector, which I am very keen to talk to you about. But before we get there, I do have to ask you. I don't know if you know this, but the first investment that Ben made was not in a high-flying Chinese Internet company. It was, of all things, in a Target Date fund. He's the oldest, youngest investor of all times.

It was very responsibly made in my IRA, I should mention. A little birdie told me that you have a history with Target Date funds. So I'd love to ask you briefly, what is your history with Target Date funds? Yeah, I was very fortunate that I joined the team way back when in 2001 at Fidelity that pioneered Target Date investing. And I was a portfolio manager on the target date strategies for 10 years until I left in 2011. I always thought it was Vanguard. That's interesting. Records set straight.

Yeah, no. In fact, Fidelity started that business back in 1996. And now the entire target date industry is over a trillion dollars in a U.M. Easily one of the biggest leaps forward, I think, for individual investors we've had over the last 20 years, right? To make it easy, one fund, diversified, low cost, rebalanced, all that stuff. Tax-efficient. Yep, yep. And, you know, it took a long time to figure out that we all have behavioral biases.

And what I remember very clearly is until you have something like $50,000 in a savings vehicle, you're not going to really pay attention to it. So what we saw is a lot of young people starting their careers and doing nothing with their money for the better part of five or 10 years and just leaving it in cash. So Target Day helped address that kind of behavioral bias about not doing anything. Well, we're a huge advocates, anything that can accomplish all those sort of things and let a person get on with their life and focus on things outside the market that are really more likely to move the needle with their personal health, wealth, success. we're all for it. So thank you for your contribution.

My pleasure. So wait, how did you go from Fidelity to Crane shares? And what's the story of that next leap in your career? Well, so I was a PM for 10 years. And then I wanted to manage teams of investors. And so at Fidelity, PMs can't be CIOs. So I left Fidelity and then joined J.P. Morgan's private bank where I ran a number of different investment engines. And So focusing on thematic multi-asset investing, concentrated equities, and custom fixed income. So, you know, had a decent-sized team in the private bank. So I've had the privilege, you know, I've been managing or been in the finance segment for almost 30 years, but 20 of those years, I've had the privilege of both managing money for institutions, individuals, and then also, you know, high net worth folks as well.

And then just to close the loop, I met John when I was. at JP Morgan. When I was ready to do something more entrepreneurial again, I looked them up in 2015. And after spending a little bit of time with the CEO and the CIO here, I realized how little I knew about China. In fact, if you were to ask me in prior places, how much do you know about ETF investing in China on a scale of 1 to 10? I would have said a 5. But after spending a couple of months with John and Brendan here, I downgraded myself to a 2 almost immediately. And And since that time, I may be adding, you know, half a point to a point a year. So if I'm lucky, I'm probably a sixth right now.

All right. Well, then if I'm just benchmarking, I'm a zero. I'm going to speak for Ben and say we're both zero. So excited to get up to a point one after this show, maybe even a one. All right, I want to start off with some statistics about China's Internet. This comes from a wonderful presentation on K-Web that we will link to in the show notes. All right, here it is. comparing the China, the China, that's not what it's called, China to the United States.

The total internet population is 1.05 billion versus 311 million here. And they've only, I'd say only, it's a big number. They have 74% of the population has internet access compared with 93% here. Obviously, they've a much larger share of internet users at 22% globally versus 6.5% here. All right, e-commerce. Their market is double the size of hours. versus one trillion. Total retail sales, interestingly, is playing catch up there. 6.4 trillion versus 7.1 here. And their online footprint as a percentage of the total sales

is significantly higher. 31% over 14%. So there's not a question in there. So forgive me. What is the most startling thing to you or most interesting to you about the opportunity set with China internet companies versus what we're doing here in this great country? So a lot of the trends that you're describing have to do with massive urbanization that's taken place in China. If you think about it, China is moving from a society that was largely rural to a society that's now living in cities. And China's only, you know, about 60-some percent urbanized. So when you hear about a 70 percent type internet penetration rate, that shouldn't surprise you. And if you look back 10 years, both of those numbers were probably in the 30s or 40s.

So what I see is hundreds of millions of people in China that are still going to move from rural regions into cities. And with that comes a larger internet penetration rate. So that number in the 70s should reach something like in the 80s and 90s over time. And with that comes wealth creation, a growing middle class, and consumerism. Now, keep in mind, because of the rate at which this urbanization has taken place, China has leapfrogged in certain segments, right? Like many of the things that we're used to, credit cards, you know, brick and mortar shopping and so on, China had to fast track right into digital payment and online consumerism just to address. this new demand from the growing cities.

How is that translated into people investing in the stock market in China? Because I think the Gallup poll here a couple weeks ago said it's 60% of people of households in the U.S. own stocks in some form. And I know I've heard that most of the trading in China is retail driven, but how much of the population there was actually invested in stocks in some manner? Yeah. It's a great question, Ben. And I would caution that the number in the U.S. probably

belies the success of our 401k system, right? If you think about it, I don't know if 60% of Americans own stocks outside of their 401k and IRA programs. I know a lot of those equities are held in those plans. And China's retirement system is still developing. They're just introducing a third pillar and the kind of safety, kind of safety net that we have here with our retirement plans. But right now, the equity ownership of the Chinese markets are still pretty low, definitely lower than ours here. But it's something that I would expect to develop just like ours did as their retirement system grows. What's more, very few foreigners own the Chinese mainland market. So if you think about the A share market, which is those

securities, you know, principally found on the Shanghai and Shenzhen exchanges, there aren't a ton of of investments in those markets by non-Chinese investors. But it's growing and it's really being driven by institutions. So as global pension plans, endowments, and sovereign wealth funds get more interested in China as an asset class, China is an important part of their overall emerging market exposure. We can expect that to rise. Well, this seems like I'm sure it's basics for you guys, maybe for the people who aren't as familiar with investing in China. Maybe you could just go over the different ways to invest in stocks. You talk about the A shares, what the differences are in the ways that you can access

those stocks? Sure. So if you think about the ways to access Chinese stocks overall, and by the way, in total, the Chinese equity market and the Chinese bond market is the second largest in the world, second only to the U.S. So the three ways that you can access Chinese equities is through mainland Chinese stocks, these are referred to as A shares, through Hong Kong listed Chinese stocks, which are called the H shares, H's and Henry, and then US ADRs. So if you look at, you know, crane shares ETFs, our ETFs hold some mixture of those different ways to access the market. So we have a fund called KBA, which invests only in A shares, the largest, if you will, 50 securities in the mainland market. KWeb, which is what we wrote clip on, built clip off of,

invests primarily in ADRs and the H shares, those Hong Kong listed stocks. So those are really the three major pools of Chinese capital, if you will, from a stock market standpoint. And, you know, what we saw and what I think John and Brendan saw 10 years ago when Crane shares was formed is that people weren't able to get these exposures, at least not distinctly. They had to rely on broader emerging market exposure to get exposure to China. But given that China's waiting within emerging markets is approaching 50% of the overall opportunity, it doesn't make sense to get your exposure indirectly anymore. You should be getting direct China exposure.

I want to double click on this and I'm making fun of myself or the analyst. There was a chart floating on the internet this week. Ben, did you see this of analysts, the number of times to say double-click on an earnings call for whatever reason that just keeps going up and up and up. It's become very invoked these days. Michael, is it to click the new unpack? It is. Yes.

Yes. So before we unpack some of the differences between the different share classes, I want to just throw something out at you and I'm an ideas guy. You could throw it right back if you're not into it. But Kweb is how we refer to it, right? We don't call it queb. right so why not why not instead of clip why not caleb jonathan over to you i know i know and you know what when we were thinking about tickers we have a very very stringent ticker committee uh

here uh at crane chairs and i'm being facetious we're not a bureaucratic firm but we do um you know have everybody opine on on what we think the best tickers are um in clip one and part of the issue is because you know we started thinking about different options we just never contemplate that somebody would call clip Caleb. But when we lost- You're clipping the coupons. You're clipping, right? Clipping the coupons, you know, it's, you're getting a clip.

But the challenge is, since we've launched the fund, we've heard it used a bunch of times. And it's all good. Like, we're like, okay, it doesn't matter what you call it as long as you buy it. And you can call KWat Kweb. All right. Well, now I get it.

It went right over my bald head. So that's on me, my bad hand up. All right. So getting back to the matter at hand. What are the differences between the ADRs, which is, I think, what most people here would, you know, they, you know, Baba, obviously the big IPO and Baidu and all those tickers. What are some of the actual differences between the ADRs, the A shares, and the H shares? Sure, sure. So it's just the exchanges that they're listed on.

So the ADRs are U.S. listed. so they're available on the New York Stock Exchange and the NASDAQ. And you won't be surprised to learn that the New York Stock Exchange and NASDAQ are going to have different listing rules than the Hong Kong Exchange, which is where the eight shares are, or the Shanghai and Shenzhen exchanges where the A shares are. So if you're a Chinese company thinking about how to access capital, you're going to first think about, well, where do I want my investor base to be? where do I want to attract investors from? And so the U.S. markets are very attractive for doing that. The Hong Kong markets are also very attractive for certain of these companies. And in some cases, companies will list in both.

So, for example, the version of Alibaba that we own in K-Web is the Hong Kong listed version. And increasingly, indexes that track Chinese stocks will actually say, If the Hong Kong listed security is larger or even not larger but meet certain rules, that should be the primary listing because these are Chinese companies. So when given a choice, some of the indexes will actually default to Hong Kong as the primary listing. All right. Jonathan, we're going to get to the strategy in a minute, especially the yield, which is a showstopper. We have a lot of questions about that.

But China in particular has been awful, at least, specifically Chinese Internet stock. So K-Web had a huge run. And then in 2021 to the trough of the bottom, which was back in October, it fell 82%. And you guys have a great slide on some of the stuff, some of the main drivers of that sell-off. And what you believe is already priced in. So I'm going to list the five main ones. and you could go from there where you want. So we've got four sellers, which I think would, I would say slash delisting concerns,

which was a big one. You've got the Russia-Ukraine conflict, the China macro and regulatory picture, and then the U.S. macro picture, which I guess would be, these are tech stocks and tech stocks got killed. But what do you think were the biggest ones that I've listed and are the fears behind us is 82% enough to discount whatever concerns people? may have had. Did they overdo it? Yeah, a couple of different comments, right? So we track a lot of these macro and micro factors over time. And if you look at some of these a year ago, many of them

were flashing red, right? They were scary, at least on a geopolitical front. You had China in full lockdown with a zero COVID policy. You had internet regulation aggressively impacting many of the segments that K-Web invests in. And then you also had, you know, just questions on China growth and whether or not how long it would take for China to recover once it does open up and how it's going to open up. And right after the National Party Congress, so in October, when President Xi secured another kind of unprecedented term, it became very clear to us that China was going to shift in a pro-growth manner. And that's not what a lot of market participants were observing, but we thought for sure that the way things were being positioned weren't in kind of terms of

pro-growth. So we saw zero COVID policy. That Band-Aid was ripped off and China reopened. You saw Internet regulation fade away, and that was already becoming clear by the October timeframe. And then you started to see a real commitment from the government in you know, solving some of the real estate concerns that were taking place, which was also a big overhang, and just other support. Keep in mind that unlike the U.S., which has been in a very rapidly accelerating kind of interest rate cycle, we hope rates have paused, but it's not clear. China has not been raising rates. In fact, China has been in a more kind of stimulating mode with their economy, and the 10-year hasn't budged. It's been right around 3% this whole time.

In fact, for the first time, in a very long time, the U.S. 10-year has been. had actually broken through China's tenure. So to make a long story short, we saw very significant returns from October on fact, we're probably 35% off the bottom in K-Web. And this is not unusual, by the way. K-Web is a volatile basket. It holds 30 to 40 securities typically, and it has volatility kind of in the 40% range. And when you look at historical cycles with K-WK-1, you know, cycles with K-Web, they tend to be three to five-year cycles. And peak to trough, you could have drawdowns that are, you know, 30, 40, 50%, 80% is the largest that we've seen since the creation of K-Web 10 years ago. But here's what we do know from drawdown patterns historically. The recovery period for

K-Web tends to be or has been six to seven months longer than the drawdown period. And why is that? That's because risk happens fast. So if you're going to have it take you six months to go peak the trough, it may take you 12 or 13 months just to get back to break even. This drawdown period was a 20 month period. This was the longest drawdown period that KWeb has ever experienced going back to February of 21 and we think bottoming sometime in October of last year. So we're just in the first or second inning of K Webb's recovery. And that makes sense, given that it took us 20 months to get to that bottom. And it may take longer than 20 months based on history to get back to, you know, some semblance of break-even. So it's going to be a longer cycle. And it's because we combine COVID and internet

regulation and delisting risk and geopolitics all into one ball of wax. Yeah, there was a lot. There was certainly a lot of risk that showed itself, right, in the form of an 82% drawdown. The question of has all the bad news been discounted is, of course, you know, unanswerable, but just looking at the top 10 holdings, which is 10 cent, Alibaba, I don't want to try and pronounce the food delivery one. You want to help me out there? Maitwan. Oh, Metsuan.

Okay. The three-year average revenue growth rate for these companies is 21% and 63% for five-year average annual revenue growth rate, which is obviously, you know, insane. On a forward PE basis, which is just, you know, it's estimates, so it could be wrong. But we're looking at 20 times for, again, for the top 10, which is not that high at all for companies with that growth rate. Now, you can make the argument that they should be trading at a discount given all of the various risks that we described.

But the point that I'm making is investors are, I hesitate to use the word underpricing. the growth because who knows. But anyway, there is hair on these names and on the risk, which is why they're trading at the multiples that they are. Well, think about this, right? So those names are trading at a similar PE multiple to the S&P. The S&P could still experience earnings, downward earnings revisions. And then if you take the tech sector of the U.S. equity market, it's 50% more expensive on a P.E basis. And that's not a P.E. to growth basis. That's just, you know, simple P.E. But to push back, this is not apples to apples, right? Like, investing here is very different than investing in China. And, and we see this with EM as well, right?

There's usually a 10, 20 percent discount to investing in EM vis-a-vis U.S. or developed market. So some discount is appropriate, but, you know, we're pushing out far along, you know, kind of the difference. And what I tend to look at very simply, you know, as someone who spent a chunk of my career in active management is fundamental sentiment and valuation. And the fundamentals and valuation, at least on a relative basis, relative to what you see and developed and even EM markets, is quite attractive. And sentiment is terrible. It's still terrible.

And that's just because of the geopolitical overhang. So, you know, what we tend to forget, though, is, and I'll just make one comment on the strength of the economic relationship between China and the U.S. has actually never been stronger as measured by dollars. There's 700 billion of bilateral trade that's taken place between the U.S. and China last year, and that's despite all of these carryover sanctions from the prior administration. That 700 billion doesn't include the 320 billion that Chinese companies have made in revenue, or the U.S., sorry, the U.S. companies have made in revenue in China. So U.S. companies are making a lot of money.

inside of China, and if you take those numbers together, that's a trillion-dollar economic relationship. So we could sit here and think about the saber-rattling that's taking place politically, but as long as it remains more bark than bite and the dollars being economically created, exchange between the countries continues to grow, I think that there's still considerable opportunity. We kind of need each other, right? We do. You can't just, you know, we know that, you know, there's kind of things happening with supply chains and people are localizing those. But you can't just say, all right, we're just going to disintegrate this relationship between the U.S. and China. It's actually very strong. And I think we'll continue to grow in the coming decade. All right. So we've talked to Brendan in the past about Kweb and understand the general investing philosophy there. So Clip is the new strategy that simply writes call options on, KWeb. I'm curious how this works. Michael and I've talked to different call option providers in the

past. Usually it's on more of an index basis or like a high quality name. So maybe you could explain to us the idea behind this, who this is for and why this strategy was created. And then maybe some the mechanics of how it works because I guess I've never thought about the call option on Chinese internet stocks like this. Sure. Absolutely. So last year, at the beginning of last year, we took on the study to look at covered call strategies overall in the ETF industry. And they've grown a lot. I mean, I don't know if you observe this, but there's over $40 billion. I think it's our inbox can confirm. We have a lot of emails about this. Tons of people, especially in 2022, it was a strategy that did very well in a bare market. People were clamoring for this type of strategy.

And so we thought to ourselves, geez, K-Web has a 10-year history. It has a deep options market that we don't have anything to do with, right? We're not, I mean, we are supportive of the option ecosystem, but we crane shares don't trade in K-Web options, at least not until we created Clip, but we saw that it was a very large liquid market, billions of dollars of notional in K-Web options. And we also realized that when compared to the other principal strategies in the covered call writing space, which tend to focus on the S&P and NASDAQ, K-Web was two to four. four times more volatile. So if you think about the S&P, volatility of the S&P historically is in the 10 to 15% range, NASDAQ is in the, you know, call it 20 to 25% range, and KWeb's in the 40 to 50%

range. So what that means is if you've got that much volatility and you're going to write call options, you're going to earn that much more income. It's not quite a linear relationship, but it's pretty close. So if I tell you that our volatility is 4X, another kind of benchmark or index, then our income will roughly be 4X as large. And so as we were studying the landscape, we said, how do we create, we want something very simple. This is our first foray into covered calls.

How do we create a pure play income strategy? What are the things that we can do to make this an income maximizing, strategy because keep in mind we already have a growth maximizing strategy that's kweb and so we wanted to have these bookends kweb on one side clip on the other i'm looking at the 223 distributions february through through may this is these are these are monthly distributions buck 16 buck 10 buck o three 86 cents all right 86 cents for for may the strategy today it's $19 or so. So just for the month of May, it's like a 4 to 5% yield. The current yield is an eye watering 56%. And that's not a typo out of my mouth. It's 56%. Anytime I see something like

that, the hair on the back of my neck stands up, as I'm sure it does with you. Why is this not totally, or maybe it is? How do you explain this? Sure. So what we're doing, is we're writing 30-day at the money calls. And given K-Web's current volatility, well, when we launched the strategy, the volatility implied volatility, was even higher. It was closer to 50%. It's come down now a little bit. It's in the high 30s to 40%. But when you write 30-day at the money-call options on K-Web, the option premium that you're going to collect is roughly 4 to 5% of the current price. And the way we've designed the strategy is to pay out what we collect.

We don't cap it. We know that there are some market practices that cap distributions. But if we collect 4%, we're going to pay out 4%. We collect 5%, we're going to pay out 5% with very little smoothing. So what we've been able to do since we launched the strategy is in mid, you know, we launched it mid-January, so we paid out half a month's worth of distribution in Jan, and then we've paid out a month's worth of distribution in each of the subsequent months that approximates what we collected, what we wrote in option premium.

I'm a simple man. I believe in things like risk and reward. So when I see 56% current yield, I have to just assume now we know K-Web is risky, right? I just mentioned it at 82% drawdown. So there's nothing free in there. Is there anything with the embedded within the option that's risky or is the real risk that this is a highly volatile instrument in the underlying? And so the income is the opposite. The income is high because there's a lot of volatility. There's a lot of juice in the options. But man, I just can't wrap my brain around to 56% distribution. That's something that's not illegal. And I know that this is not illegal. I just, my brain goes to a dark place. No, so let me explain. Again, going back to think about what you're substituting. So when you buy

a pure covered call strategy like K-Web, you're basically substituting the uncertain upside that K-Web could produce with a stream of income. And what this is telling you is that there is a lot of upside uncertainty with K-Web, whereby you have to make a decision, do I want to have four to five percent a month with stability, or do I want to have the uncertain upside potential without? And just to, you know, keep in mind, in markets that are very strong bull markets for K-Web, clip is going to underperform, right? In other words, you're substituting that uncertain upside for income. And what that means is if we have a 12-month period where K-Web is up triple digits, you're not going to capture that with clip. However, with clip, you have less volatility.

Because, you know, the, even though we invest in KWeb and write calls, the overall portfolio tends to be less volatile, you know. So let me take the other side of myself. So you can get a four and a half percent monthly distribution. For example, give or take on the month of May, but the investment could go down 17 percent, right? Like, it's not impossible that there are some really bad monthly returns. So just getting back to what you just mentioned, let's say that KWeb is in a bull market. and is up, you know, whatever. Let's just say it has a great run.

What would returns look like in Clip versus Kweb? How different would they be? I'll give you, I'll just throw in a number. Let's say Kweb goes on a crazy run and it gains 50% of the next six months. What would you, and I'm obviously not going to hold you to this, but if you had to guess, what would you expect Clip to be up in that scenario? If Kweb didn't have prolonged periods of drawdown over that six month period, then you would just to earn the monthly option income, which so far has been four to five percent.

And so you're not going to, you know, you're not going to reach that 50 percent level over a period of six months. Because you keep hitting those call options, right? Yeah, every 30, you know, we're writing calls that are at least 30 days in duration, but they tend to be short. We found that you maximize your income opportunity in kind of that 30 to 60 day range, so that's where we operate. Seeing that these are volatile stocks that you're writing the options on, does that mean that the income you can expect be pretty volatile as well, depending on the environment? It can move around a little bit.

Right now, as I'd mentioned, we launched Klipp in one of the higher implied volatility environments. Right, you'd expect the volatility to be higher in a bare market. Correct, correct. And then volatility will come down, and so the income level could come down as well. when we looked at this historically and just looked at what at the money calls look like, you know, going back several years, the numbers were lower. And the rule of thumb is, whatever the volatility is, if you divide that by 10, that's approximately what your monthly

income is. So for a 50-vall basket, a 5% income level is approximately accurate and a 40-val, 4%. So, you know, if you say that historically over all time, KWeb's in the, you know, mid to upper 30s, then monthly income should be in the mid to upper threes. I would imagine the hope would be eventually, as these companies mature, that the volatility would come in as well, right? That you'd expect over time that these stocks wouldn't be quite as volatile. Yeah, we think that just because of the way we've constructed KWeb, we've intended to be a high-conviction thematic basket. So it's going to be more volatile than broad China and more volatile than broad emerging markets. But you're right. You can have a maturing take place, just like Microsoft is probably less volatile today than it was 20 years ago. I think that's a fair point. But what we found is that most of our

users, early users of clip, are investors that already know KWeb pretty well, and they're doing some blend. They're recognizing that there's a lot of upside for KWeb, but they also see that, you know, being able to target a level of income is a pretty neat feature. So they can, you know, you don't have to own a lot of clip to move the needle on the distributed income that you receive. Jonathan, I'm not a tax guy, but I would imagine that with distributions this chunky, you would want to keep that in a tax sheltered vehicle. I mean, I think that's definitely a good way of using it.

And then also rebalancing regularly, you know, one of the other, you know, risks, if you will, to clip. And I'm experiencing this myself because I'm one of the early investors in Clip. is that the money comes back fast, right? So if three months go by and you've collected 15% of what you put in, like you need to put that money to work. And so we're doing a lot of analysis now on different rebalancing, kind of cash flow rebalancing strategies.

You know, do you put it into KWeb? Do you put it back in a clip? Do you move it elsewhere? That's your next strategy. It's an ETF that is clip, but it reinvested the proceeds back into Kweb. There you go. There you go. I want to be on the ticker committee for that one.

Yeah, I like it. We'll pull you in. You mentioned figuring out the different option strategies for, you know, the length of time and that sort of thing. How much portfolio management is required here and how much could that change over time? Sure. So this is an active strategy. And what I've learned in my career is that, you know, the best investors are high conviction. But I very much believe that portfolio construction is key.

So we've created this strategy in a very simple way with very simple rule. We're not out there trying to add value beyond the basics here, which is really income generation. So the other thing I should mention on taxes is because we invest in K-Web itself and write options on K-Web, not on some K-Web index or some pool of securities, we're following what's called Q-CCO treatment, qualified covered call option treatment. This would be the same treatment that you would get. that if you bought, say, Apple stock and wrote calls on Apple stock, and it's different than mixed straddle treatment, which is what you would get if you didn't align the underlying

the underlying with the call. So there are certain rules that you have to follow to do that, like writing options that are at least 30 days in length. But it gives you common sense tax treatment. In other words, you don't get artificial deferral of gains or losses or anything like that. So when we studied the marketplace, we thought, geez, we don't think anybody's using this way of writing covered calls. Everybody is doing something where the options don't match the underlying security. But because Kweb is something that we built, we have this unique ability to pair those things up together. All right. So the tickers clip with the Jonathan, if people want to learn more, where do we send them?

Craneshares.com slash clip and craneshares.com slash Kweb to see what we invest in as well. Appreciate the time. Thank you. Real pleasure. Thanks. Thanks again to Jonathan for coming on. Remember that's crane shares.com slash clip or craneshares.com slash Kweb. Email us, Animal Spiritspod at gmail.com.