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.