Can Alibaba Earnings Help Pull Retail ETFs Out of a Rut?

For owners of exchange-traded funds that hold Alibaba Group Holding, Thursday’s fiscal fourth-quarter earnings report may hold signs as to whether or not China’s biggest online retailer is on the mend. 

Big online retailing ETFs haven’t had the smoothest ride over the past few years, as many trade below highs reached after pandemic restrictions were put in place. For example, the ETF with the biggest Alibaba exposure, the ProShares Online Retail ETF (ONLN), has dropped around 13% over the past three years.  

Investors may be watching for signs that China’s attempts at post-COVID-19 reopening, and a recent diplomatic rapprochement with much of the rest of the world are paying off and translating into better earnings and outlook. 

For Alibaba, the intrigue is heightened by the recent disclosure by famed short-seller Michael Burry, portrayed in the film “The Big Short,” that his hedge fund has doubled its long position in the stock. Clearly, a bullish indication for many investors.  

The report will be the first since Alibaba’s March announcement that it plans to break into six distinct businesses, so even investors without direct ties to the company’s stock may be watching. 

Investors may have exposure to Alibaba if they invest in large capitalization growth ETFs. For the quarter, the company’s sales are expected to drop slightly to $30 billion from $30.28 billion in the year-ago quarter, Forbes reported, citing analysts surveyed by FactSet. Earnings are expected to rise to $1.36 a share from $1.18 last year. 

Here are the funds with the largest Alibaba weightings, and some insight into what each ETF does to complement that significant position in the widely-followed Chinese stock. 

First Trust International Equity Opportunities ETF (FPXI) 

This ETF is not a household name, at $203 million in assets, but should probably get more attention than it does, given its straightforward and high-potential approach. It tracks an index of the 50 largest non-U.S. stocks, including Alibaba, which is an 8.6% portfolio weighting in the fund. Non-U.S. stocks have severely lagged the U.S. market for the better part of the past decade. However, since FPXI’s 2014 inception date, it has produced a 12-month gain of more than 45% on two occasions, in 2018 and 2020. Both of those rallies far exceeded the gain of the S&P 500 over that time.  

ProShares Online Retail ETF (ONLN)  

This ETF’s nearly 12% allocation to Alibaba is the highest weighting to that stock in the U.S. ETF industry. Despite that, it is not even close to the largest holding in ONLN. This hyper-niche ETF also has a more than 24% weighting in Amazon.com, Inc., so the global online retail duopoly combines for more than one-third of ONLN’s $99 million in assets. Alibaba’s dominance in that industry is clear from the fact that it makes up more than half of the non-U.S. weighting of this U.S.-centric ETF.  

Invesco Golden Dragon China ETF (PGJ) 

The trio of relatively unknown ETFs that offer what might be considered an “Alibaba-plus” investment portfolio includes this nearly 20-year-old fund, which sits at just under $200 million in assets. PGJ, a China-focused ETF, sells at a significant discount to the other two ETFs mentioned here, with a weighted average P/E ratio of 17.2x based on trailing earnings. Alibaba is about 8% of the fund. For investors optimistic about a long-awaited China economic resurgence, it is notable that PGJ sells at an enormous 68% discount to its February 2021 peak price. 

Alibaba’s period of dramatic transformation has put a spotlight on this market bellwether. The period between Thursday’s earnings report and the completion of the company’s ambitious reconstruction could be a key driver of a long-awaited return to the seemingly forgotten strategy of global diversification.