Indirect Alibaba ETF Plays Rise Ahead of IPO

Alibaba’s initial public offering is almost here and in the fervor surrounding one of the most widely anticipated IPOs in recent memory, there has been ample chatter about the future exchange traded fund homes of the Chinese e-commerce and payment processing firm.

Some index providers, including MSCI, are on the fence regarding the addition of Alibaba to its indices. Others, such as S&P Dow Jones Indices, have made clear that Alibaba is eligible for inclusion in their indices. That means the stock can eventually well-known ETFs, such as the SPDR S&P China ETF (NYSEArca: GXC) and the SPDR S&P Emerging Asia Pacific ETF (NYSEArca: GMF). [S&P Gives a Lift to Alibaba’s ETF Prospects]

Other ETFs that can be considered derivative plays on Alibaba have been enjoying Alibaba fever. Take the WisdomTree Japan Hedged Tech Media & Telecom Fund (NYSEArca: DXJT) as a perfect example.

The current environment has been a near perfect storm for the unheralded DXJT. DXJT is a sector equivalent of the popular WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ), meaning the former like the latter has been enjoying the recent tumble of the yen to six-year lows against the U.S. dollar.

As if the yen hedged effect is not enough, DXJT’s largest holding is a 9.3% weight to Japan’s Softbank, which owns over a third of Alibaba. Think that Softbank weight doesn’t make a difference? Think again. DXJT is up 5.2% in the past month while DXJ is up 3.6%. [An ETF With Indirect Alibaba Exposure]

The combination of the yen hedge and the Alibaba backdoor with Softbank via DXJT has proven more rewarding in recent weeks than owning ETFs heavy on Yahoo (NasdaqGS: YHOO). Although Yahoo owns 23% of Alibaba, it is expected to trim that stake by 20% in the IPO. Over the past month, the First Trust Dow Jones Internet Index Fund (NYSEArca: FDN) and the PowerShares NASDAQ Internet Portfolio (NasdaqGM: PNQI), which have an average Yahoo allocation of about 5%, have been essentially flat. [Alibaba’s Valuation: What it Means for ETFs]

Due to Alibaba’s decision to incorporate in the Cayman Islands and not list on the NASDAQ Stock Market, the stock will not be made directly available to investors on China’s mainland. A NASDAQ listing would have ensured Alibaba’s entry into the PowerShares QQQ (NasdaqGM: QQQ), the NASDAQ-100 tracking, for which there is a mainland China equivalent.