39% Dividend Yield?

Apologies for the clickbaity title, but it’s true (for now). And 39% is an understatement; not counting the 30% withholding taxes (I guess you may know where this counter is listed at), the current yield is sitting at around 56%¹.

Introducing KLIP

 

So, what is this marvellous counter?

 

It is the KraneShares China Internet & Covered Call Strategy ETF (ticker: KLIP), listed on the NYSEARCA.

 

Incepted early this year, KLIP is an income-focused ETF that provides a monthly dividend to investors by writing options on its own sister ETF, the KraneShares CSI China Internet ETF (ticker: KWEB).

 

I had written how covered call ETFs work and vested in one of them, but to put in summary covered calls, though having a limited upside due to its nature, works well in times of market volatility. The past years had seen the Chinese technology and internet-related firms going through a roller coaster, partially in due to the sector’s regulatory crackdown and semi-conductor sanctions, etc., so in a way it plays into KLIP’s strategy.

 

Listed on 12 Jan 2023, KLIP’s price to date is down by about 33%, but with dividends propping it up, a Singaporean investor vested from the beginning would have a net gain of around 2.7% after taking in withholding taxes and without dividend reinvestment. From the fund fact sheet², the total annual fund operating expense sits at 0.95%, which is relatively high as compared to RYLD’s 0.6%. The ETF’s net assets are around USD 120 million.

Let us compare with the sectoral equivalent Global X Nasdaq 100 Covered Call ETF (ticker: QYLD), in terms of performance over the same period (i.e., from 12 Jan 2023); QYLD price was up by 3.3%, a current yield of 7.7% (30% withholding taxes applied) and an overall gain of 10.3%³. Despite the lower yield, QYLD had performed better than KLIP; these are two dimensions from which dividend investors must understand: Firstly, total returns included capital gains and income derived. Secondly, yield is a ratio of dividends over price, and a higher yield does not imply higher dividend amounts.

 

However, it would be unfair to compare these two as such, due to QYLD’s longer history (incepted on 11 Dec 2013), and how the technology and internet sectors (and the overall economy) of China would fare in the future.

 

The Bedokian’s Thoughts

 

If you had noticed, this blog post is not written under the “Inside The Bedokian’s Portfolio” series, which means I have yet initiated a position and I am keeping watch on this. Understandably, KLIP is attractive with a high yield. One could imagine that the counter could get “freehold status” (i.e., common speech amongst dividend investors of the distributions paying off the initial capital amount) in three years. Comparatively, it is one of the highest yielding covered call ETFs I had encountered.

 

However, over the past 11 months, both price and dividends were undulating, thus the “freehold” concept would be very dependent on one’s entry price and the subsequent yield derived. This point, from another angle, makes it tricky to capture higher yield at a given entry price and dividend income. Being less than a year old, the track record runway is considered short. 

 

Granted that a lot of covered call ETFs did not surpass their listing launch price, the Bedokian’s approach to them is to enter them on a “nibbling” basis and to obtain the yield to either reinvest back onto the ETFs or as dry powder for other U.S. counters. Being derivative in nature, such ETFs are placed inside our trading portfolio instead.

 

1 – Current yield is based on the total monthly dividend payouts between Jan and Nov 2023 of USD 9.336 divided by the price of USD 16.63 as of 1 Dec 2023. Dividend reinvestment not considered. Sourced from Yahoo Finance.

 

2 – KraneShares China Internet & Covered Call Strategy ETF fact sheet. 31 Oct 2023. https://kraneshares.com/resources/factsheet/2023_11_15_klip_factsheet.pdf (accessed 3 Dec 2023)

 

3 – Current yield is based on the total monthly dividend payout between Jan and Nov 2023 of USD 1.877 divided by the price of USD 17.07 as of 1 Dec 2023. Closing price of QYLD as of 12 Jan 2023 was USD 16.52. Dividend reinvestment not considered. Sourced from Yahoo Finance.