ETF Investors Bracing For Alibaba IPO

September 10, 2014

There’s a lot to consider about the Chinese e-commerce giant’s IPO.

Alibaba’s U.S. IPO roadshow is well underway this week, and it’s going extremely well for the Chinese e-commerce giant that plans to list its shares on the New York Stock Exchange, perhaps as soon as next week. ETF investors will soon be faced with choices once what looks likely to be the largest tech IPO is a done deal.

Reuters reported this week that in the first two days of its roadshow, Alibaba had already attracted enough investor interest to cover the entire cost of the deal. By most estimates, the IPO could easily raise more than $20 billion, going above Facebook’s record-breaking IPO in 2012 that raised $16 billion. It’s expected to price on Thursday, Sept. 18.

The huge buzz around the Alibaba Group IPO is entirely warranted. The company is a vast 21st-century virtual bazaar—a business-to-business marketplace, an online retail platform, a shopping search engine and a collection of cloud computing services, to name some of its business lines.

“Increasingly, retailing is taking place online and, regarding the big-box stores that we’re used to here in the U.S. that have really been hurt by technology and companies like Amazon or Priceline, China is jumping over that stage in a lot of respects,” Brendan Ahern, head of the China-focused ETF firm KraneShares, told ETF.com in a recent interview.

Alibaba is expected to list on the NYSE under the ticker “BABA.”

Why This IPO Matters

Putting a finer point on the IPO, Ahearn said the deal is important because it should put China’s booming Internet expansion in focus.

Consider that in late August, Alibaba reported that revenues doubled in the second quarter year-on-year, while net income tripled thanks to a tenfold jump in mobile sales. The results pushed the company’s “internal valuation” to $140 billion, according to the Financial Times.

“The whole world is going to know the China Internet story because Alibaba is just going to be too big to ignore,” KraneShares’ Ahern said of the expected IPO.

 

Tech-Segment Shake-Up

Beyond that, there are other factors that make this IPO something worth watching, as we’ve outlined before, including the fact that its sheer size could make waves in the broader tech space as investors reallocate assets to make way for the big new presence.

“In order to fund their purchase of the new company, some money managers may choose to sell a portion of their existing holdings,” Nick Colas, chief market strategist of ConvergEx Group, said in a commentary earlier this week. “Which stocks—if any—come under pressure will be somewhat of a Wall Street guessing game for the next two weeks.”

“The most likely candidates will be other large-capitalization growth-oriented technology names,” Colas added. “Alibaba has some pretty powerful business fundamentals to commend it, both in terms of top-line growth and outsized profit margins. It will be difficult for many growth managers to ignore those factors and simply stick to their existing portfolio allocations and positions.”

Where Will Shares Of ‘BABA’ Pop Up?

Because Alibaba will be U.S.-listed, and not Hong Kong-listed, its shares might not qualify for several ETFs that are linked to MSCI and FTSE emerging market and China benchmarks. MSCI and FTSE indexes use as one of their main security selection criteria a stock’s primary listing.

That means broad funds like the iShares MSCI Emerging Markets ETF (EEM | B-98) and Vanguard FTSE Emerging Markets ETF (VWO | C-90)—the two largest emerging market ETFs today—would most likely not include shares of Alibaba. But much-smaller SPDR S&P Emerging Market ETF (GMM | D-87) might, which could help push the fund more to the forefront of the emerging market space.

Similarly, popular China-focused funds such as the iShares China Large-Cap ETF (FXI | B-51), and the iShares MSCI China ETF (MCHI | B-43) would probably not be eligible to own Alibaba shares either.

ETF investors will also not find Alibaba shares in the S&P 500 Index despite the company’s U.S.-listed and market-cap status because the S&P 500 tracks “leading companies in leading industries of the U.S. economy,” Colas pointed out.

Alibaba’s U.S.-listing could prove an opportunity for smaller funds such as the KraneShares CSI China Internet ETF (KWEB | B-23). KWEB focuses exclusively on China’s tech sector, and was deliberately launched ahead of Alibaba’s IPO.

Moreover, funds like the PowerShares Golden Dragon China Portfolio (PGJ | B-23), for example, could also emerge as a likely portfolio destination for Alibaba’s brand-new publicly traded shares. PGJ invests solely in U.S.-listed companies that derive the majority of their revenues in China.

The first ETF to add Alibaba to its portfolio, however, is likely to be the Renaissane IPO ETF (IPO | F-34), which has a "fast entry" rule for large IPOs, according to its issuer. Alibaba should be added to IPO on its fifth day of trading.

 

 

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