This ETF Should Hold Alibaba, but it Probably Won’t

Let’s clear that headline up right off the bat. It is not a condemnation of the issuer behind the exchange traded fund highlighted here. Nor is it a criticism of the index provider or its methodology.

With that out of the way and with news that Alibaba will commence the roadshow for its initial public offering on Sept. 3 with an eye toward a Sept. 16 listing on the New York Stock Exchange, it is worth noting the Chinese e-commerce juggernaut is unlikely to be a quick addition the Powershares Golden Dragon Halter USX China Portfolio (NYSEArca: PGJ).

Even a brief look at PGJ indicates the $273.3 million ETF makes for a logical home for Alibaba. While not a dedicated technology/Internet ETF, PGJ allocates 52.7% of its weight to tech stocks and another 24% to consumer discretionary names. PGJ is also home to some of the most notable and high-flying Chinese Internet stocks, including Baidu (NasdaqGS: BIDU), (NasdaqGS: CTRP) and Vipshop (NYSE: VIPS), among others. [ETFs With a VIP of Internet Stocks]

However, PGJ must be included on what is becoming a lengthy list of ETFs that will have difficulty including Alibaba because of the company’s decision to incorporate in the Cayman Islands.

PGJ tracks the NASDAQ Golden Dragon China Index, which mandates that the issuers of constituent securities must be headquartered or incorporated in China (excluding Hong Kong) at the time of review, according to NASDAQ OMX Global Indexes.

Similar reasoning will keep Alibaba from an array of ETFs that benchmark to MSCI indices. MSCI has analyzed the country classification of Alibaba Group Holding. Based on current information, the company will  be incorporated in Cayman Islands, it will file 20-F only and it will list in the US only, through American Depositary Shares (ADS). Consequently, based on the above and as per the Appendix III of the MSCI GIMI Methodology Book, the company is not eligible for inclusion in the MSCI Global Investable Market Indexes (GIMI),” according to the index provider. [No MSCI ETFs for Alibaba]