Alibaba IPO’s Huge ETF Conundrum

September 15, 2014

First, this potentially has implications for Alibaba shares, since there are several hundred billions of dollars in assets tied to index funds (and ETFs) globally.

According to MSCI, there was about $210 billion in assets from passive index funds tied to its emerging markets indexes as of May 2014. Most of these funds won’t be eligible to purchase Alibaba shares.

How that will ultimately impact the shares over the long term is difficult to predict. You’re basically trying to predict demand for Alibaba shares months from now, since most of these broad indexes take months for shares issued in an IPO to be included anyway.

That said, I think it’s fair to say that it’s somewhat of a hurdle for Alibaba shares. If it listed in Hong Kong, there would have been additional hundreds of billions of dollars in passive fund assets waiting to purchase the shares in the coming months (of course in proportion to the shares’ appropriate weighting within the funds, mostly determined by free-float market-cap).

Secondly, ETF investors are impacted because they are shut out from exposure to some of China’s fastest-growing, entrepreneurial companies (Chinese e-commerce and e-tailing), raising the question of whether ETF investors are truly getting full coverage of the broad Chinese equity market.

Looking beyond broad emerging market ETFs, it’s unfortunate that investors in China-focused ETFs like the $6 billion iShares China Large-Cap ETF (FXI | B-51) and $1.1 billion iShares MSCI China ETF (MCHI | B-43) aren’t fully getting exposure to the “best of China.”

This issue reaches far beyond just Alibaba. I’ve harped on this for a while, but basically all U.S.-listed Internet companies are ineligible in the above-mentioned funds. This includes Baidu, SINA, Weibo, JD.com, NetEase … the list goes on.

Interestingly, only last week, MSCI suddenly announced it would begin consultation on potentially including these offshore incorporated Chinese companies, or N-shares, in its Global Investable Market indexes.

I don’t think the timing of this announcement is a coincidence. I can only imagine how many phone calls and inquiries MSCI must be getting about Alibaba’s inclusion in its indexes.

So which ETFs will include Alibaba?

 

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