To mitigate interest rate volatility, fixed income investors may need to diversify their streams with other sources. One possible option is the KraneShares China Internet and Covered Call Strategy ETF (KLIP), which offers a monthly distribution.
It’s unknown whether the Federal Reserve will keep rates unchanged, continue hiking, or even cut. The current prevailing sentiment, at least among institutional investors, is that rates will continue following a higher-for-longer narrative.
“More than three quarters of U.S. institutional investors are expecting interest rates and inflation to remain elevated for at least the next 12 months, putting fixed income investments in pole position to generate the best returns in 2024,” Investment News reported.
While rising yields offer attractive options for assets like bonds, KLIP offers a covered call strategy to extract additional income. The strategy uses options, which allow for income via option premiums. KLIP offers monthly distributions.
Upside Exposure to China Tech
In addition to monthly distributions, KLIP investors get exposure to China’s tech sector as the fund sells covered call options on the KraneShares CSI China Internet ETF (KWEB). While the country’s tech sector can be highly volatile, in the covered call options market, volatility could open opportunities for more yield and potential price appreciation when KWEB rallies.
KWEB measures the performance of publicly traded companies outside of mainland China that operate within the country’s internet and internet-related sectors. The fund provides exposure to the Chinese internet equivalents of Google, Facebook, Amazon, and eBay, which includes names like Alibaba Group and Tencent Holdings.
“KLIP allows investors to take advantage of volatility in China internet stocks by providing attractive monthly distributions that are highly correlated with the underlying ETF shares,” KraneShares noted.
China is currently working on its economic doldrums via stimulus measures. If the second largest economy can reinvigorate growth, that could translate to gains for KWEB. Subsequently, in the meantime, KLIP investors can still harness the fund’s income potential.
“KLIP exchanges the uncertain upside potential of KWEB for premium income,” KraneShares added. “In a declining price period for KWEB, KLIP will provide monthly income distributions that will offset some of the price declines in KWEB. In an increasing share price period for KWEB, KLIP’s share price will remain relatively stable and KLIP will continue to distribute monthly income that is aligned with the options premium earned by the Fund.”
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