Alibaba IPO’s Huge ETF Conundrum

September 15, 2014

Finally, it’s worth pointing out that GICS has assigned Alibaba to the consumer discretionary sector, not information technology. This might have implications for funds like the $78 million Guggenheim China Technology ETF (CQQQ | C-25), which uses GICS for sector classification purposes.

Meanwhile, it’s possible Alibaba can show up in consumer-related emerging market ETFs, depending on which sector classification is used for their underlying indexes.

Immediately coming to mind is the $1.3 billion EGShares Emerging Markets Consumer ETF (ECON | C-38), which uses ICB’s classification. As of this writing, I haven’t been able to confirm ICB’s sector classification of Alibaba.

In conclusion, Alibaba’s choice to list in New York instead of Hong Kong so that its founders can hold onto more control of the company makes Alibaba shares ineligible for inclusion into the 4th-, 5th- and 7th-largest ETFs in America (VWO, QQQ and EEM, respectively), which total $141 billion in assets, combined.

That said, I think Alibaba’s IPO is ultimately good for ETF investors as a whole. It’s finally bringing to light the complexities around China share classes, and how they impact indexes and the associated ETFs.

I believe, at the end of the day, this will only lead to investors making better investment decisions around China ETFs.


At the time this article was written, the author held a long position in ASHR. Contact Dennis Hudachek at [email protected], or follow him on Twitter @Dennis_Hudachek.

 

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