09/17/14   How To Play Alibaba With ETFs – Don’t

Editor’s Corner

Ron Rowland

Unless you’ve been living under a rock, you are probably aware that Alibaba’s initial public offering (“IPO”) is slated for Friday.  Alibaba Group Holding Ltd. expects to raise about $23 billion, making it the largest IPO in the history of the world and valuing the company at more than $160 billion.  Although it’s known as the Chinese internet retailing behemoth, its legal structure makes it a Cayman Islands entity, and its only stock market listing will be depository shares on the NYSE with BABA as the ticker symbol.

This unique three-country confluence has put index providers in a tizzy.  It’s a Chinese company, but without a listing in Shanghai or Hong Kong, it doesn’t qualify for many Chinese stock indexes.  It will trade in the U.S. on the NYSE, but it is not an American company since it is domiciled in the Cayman Islands.  Furthermore, although it is known as an internet company, it will technically be classified as part of the consumer discretionary sector along with other retailers.  Alas, there appears to be a dearth of indexes that include U.S.-listed Chinese retailers in the Cayman Islands.

It seems every time a stock makes headline news for an extended period, you inevitably see articles touting how to play said stock with ETFs.  Whether it’s Alibaba (BABA), Apple (AAPL), Alcoa (AA), or any stock from A to Z, the way to play that stock with ETFs is the same – don’t.  Think about it a minute.  Whether a company has a 1%, 5%, or even a 20% allocation in an ETF doesn’t matter.  The best way to “play” that company is with dedicated securities.  In other words, that company’s stock, options, and warrants provide much better vehicles than watered down ETFs with the majority of their assets in other companies.

IPOs seem to generate additional interest about which ETFs will (or will not) include the new stock.  Investors hoping to profit from an opening day pop in price are out of luck.  No ETF will own BABA before it goes public, not even the ETFs that specialize in IPOs.  It’s a well-known fact that Yahoo! (YHOO) owns a big stake in Alibaba, and therefore, ETFs with a large allocation to Yahoo! could benefit from an opening day pop in Alibaba.  While that may be true, if your goal is to profit from a rise in price of Yahoo! shares, then cut out the ETF middle-man and buy Yahoo! stock or options.  The advice remains the same – do not use ETFs to play individual stocks.

Investor Heat Map 9/17/14


Health Care successfully navigated the volatile week and held on to its first place ranking.  Some Technology segments encountered selling pressure, but the overall sector performed well enough to remain in second place.  Financials climbed a notch to third while the defensive nature of Consumer Staples helped it jump four spots to land in fourth.  Investor sentiment is mixed when it comes to retailing and homebuilder stocks, resulting in Consumer Discretionary keeping its fifth place spot.  Materials and Utilities swapped places again this week with Materials taking the lead today.  Industrials and Telecom each moved up a notch and continued to post positive momentum scores.  Real Estate plunged from third to tenth as the sector came under intense selling pressure.  Investors are concerned that rising interest rates will be negative for the sector and pushed it into a downward trend.  Energy is on the bottom for a second week.


The style rankings have begun shifting toward a defensive posture with blue chips gaining relative strength.  Mega Cap climbed three spots to grab top honors and pushed Mid Cap Growth down to second.  Members of the Large Cap trio are all in the upper half now, thanks to a two-step climb for Large Cap Value.  Mid Caps controlled the top tier a few weeks ago, but the defensive shift has now pushed Mid Cap Blend and Mid Cap Value down to sixth and seventh.  The four categories with the smallest capitalizations remain at the lower end.  Small Cap Growth still has some positive momentum, while Small Cap Blend has lost its upside thrust.  Micro Cap managed to climb out of last place, although it flipped over to a negative trend in the process.  Small Cap Value now trails the pack and finds itself in the red.


Most foreign markets had much of the wind taken out of their sails this past week amid strength in the U.S. dollar and weakness in equities.  China kept its grip on the top spot and should get a psychological boost from the upcoming Alibaba IPO.  Latin America had a rough week, and the Brazilian real dropped more than 4% since the first week of September, yet the region managed to hold on to second place.  The U.S. moved up a notch and is now in a virtual tie with Latin America.  Canada followed the U.S. up the ladder to land in fourth.  World Equity lost momentum, although less than most other categories, allowing it to climb two places to fifth.  Emerging Markets fell three spots to land in sixth, marking the first time in 19 weeks that it failed to be included among the top-five.  Pacific ex-Japan, hampered by currency weakness in the Australian dollar, fell three spots and flipped over to negative momentum.  There are now five global categories in the red, with Europe and the U.K. sitting on the bottom from a relative strength standpoint.


The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.


“How to Play the Alibaba IPO with ETFs.”

A reputable financial website

“China ETFs Best Way to Play Alibaba IPO.”

Another reputable financial news outlet


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