Daily ETF Watch: Alibaba Buzz Growing

Is the Chinese e-commerce giant going to turn up in your fund?

Reviewed by: Heather Bell
Edited by: Heather Bell

Is the Chinese e-commerce giant going to turn up in your fund?

China’s Alibaba Group is on track to become the biggest IPO ever. Demand for its IPO has raked in so many orders that the New York Times reports that underwriters plan to close the order books on Wednesday, Sept. 17 in advance of the Sept. 18 IPO. There’s even talk of upping the price range.

But as Cinthia Murphy reported on Sept. 10, the stock isn’t likely to show up in the ETFs that investors would most expect to find it in. For one thing, China’s latest breakout stock isn’t listing in mainland China or even Hong Kong, but on the New York Stock Exchange.

That means investors may not find it in the two largest emerging markets ETFs—the iShares MSCI Emerging Markets ETF (EEM | B-98) or the Vanguard FTSE Emerging Markets ETF (VWO | C-90). The former tracks an index from MSCI, while the latter is based on an index provided by FTSE; those two index providers both base a stock’s country classification partly on where its primary listing is located.

It will also stand a good chance of being excluded from the iShares China Large-Cap ETF (FXI | B-51) and the iShares MSCI China ETF (MCHI | B-43), Murphy notes.

However, S&P Dow Jones Indices has recently issued a press release stating that it had determined Alibaba is domiciled in China and that it could be included in any of the standard S&P Dow Jones indexes that that cover China. The press release specifically noted that Alibaba would be eligible for inclusion in the S&P China BMI and, by extension, the S&P Emerging BMI and S&P Global BMI.

With the possibility of the IPO pushing past $21 billion in value when it actually happens, it seems highly likely that S&P DJI will be adding Alibaba to its benchmarks. And that means it could be included in less popular EM funds like the SPDR S&P Emerging Markets ETF (GMM | C-87), which has about $275 million in assets under management (AUM), or the SPDR S&P Emerging Asia Pacific ETF (GMF | C-78), which has $726 million in AUM.

Murphy also points out that the stock could show up in some smaller and more unique funds, citing the KraneShares CSI China Internet ETF (KWEB | B-23) and the PowerShares Golden Dragon China Portfolio (PGJ | B-23), which targets companies that operate in China but are listed in the U.S.

There is also an emerging markets Internet ETF that was recently put into registration by Exchange Traded Concepts; the filing specifically notes that the portfolio could be dominated by a particular country, like China.

However, an IPO ETF is the most likely place to see it first. The Renaissance IPO ETF (IPO | F-34) has a fast-entry rule for large IPOs that could result in Alibaba being added after just five days of trading, Murphy notes.

But don’t forget, Yahoo owns a 22.4 percent stake in Alibaba, and the connection has already boosted Yahoo’s stock. According to the IPO filing, as reported by Zacks Equity Research, Yahoo is looking to sell a chunk of its stake in the IPO, reducing its holdings to 16.3 percent of Alibaba.

That means almost any broad, large-cap U.S. or U.S. tech-focused ETF is likely to get at least a little exposure to Alibaba’s performance. Yahoo represents a little over 1 percent of the Technology Select Sector SPDR (XLK | A-78).


Heather Bell is a former managing editor of etf.com. She has also held editorial positions at Dow Jones Indexes and Lehman Brothers. Bell is a graduate of Dartmouth college and resides in the Denver area with her two dogs.