Shares of newly public Chinese e-commerce giant Alibaba (NYSE: BABA) are trading lower by more than 1% Wednesday despite a spate of bullish calls from Wall Street analysts. Amazon (NasdaqGS: AMZN), one of the U.S. companies to which Jack Ma’s Alibaba is most often compared, is trading modestly higher.
One day does not make a trend, but in terms of pure price action during the month of October, Alibaba is eating Amazon’s lunch. Entering Wednesday, Alibaba was sitting on an October gain of nearly 16% while Amazon was off almost 7%. Not surprisingly, that performance differential has fostered a glaring gap in the October returns offered by two popular Internet exchange traded funds.
The KraneShares CSI China Internet Fund (NasdaqGM: KWEB) was one of the first ETFs to add Alibaba following the company’s September IPO. KWEB added the stock on Oct. 3, meaning that when markets close this Friday, KWEB will have traded with Alibaba for all but two trading days this month. [China Internet ETF Adds Alibaba]
As of Tuesday, Alibaba was KWEB’s largest holding at a weight of 10.6%, or more than the ETF allocates to Ctrip (NasdaqGS: CTRP) and Vipshop Holdings (NYSE: VIPS) combined. At least for now, KWEB and the Renaissance IPO ETF (NYSEArca: IPO) Renaissance IPO ETF (NYSEArca: IPO) are the “Alibaba ETFs.” As KWEB shows, that is a nice status to have when an ETF allocates almost 11% of its weight to a stock that jumps nearly 16% in less than a full trading month.
Unfortunately, investors are getting it wrong with Internet ETFs. At least that has been the case this month as investors have opted for one well-known, Amazon-heavy ETF over KWEB. TheFirst Trust Dow Jones Internet Index Fund (NYSEArca: FDN), which allocates 7.8% of its weight to Amazon, making the stock the ETF’s second-largest holding behind Facebook (NasdaqGS: FB), has added almost $74 million in new assets this month while KWEB has lost $6.7 million.
To its credit, FDN has managed a slight October gain, no small feat considering investors’ immediate reaction to the recent earnings reports from Amazon, Netflix (NasdaqGS: NFLX) and Twitter (NYSE: TWTR). Netflix and Twitter combine for 6.7% of FDN’s weight. [Netflix Could Weigh on These ETFs]
Investors’ devotion to FDN is understandable. The ETF is home to a slew of high-priced stocks, making it an ideal avenue for capital-constrained investors to access a bunch of sexy U.S. Internet stocks. That devotion has come at a price though because Amazon is just one of 17 S&P 500 members that have fallen 20% or more this year. Yes, that means Amazon is in a bear market. [Amazon’s Bear Market Problematic for These ETFs]
On the other hand, the average year-to-date for KWEB’s top-10 holdings excluding Alibaba is 30.2%.
Tom Lydon’s clients own shares of Facebook. Todd Shriber owns shares of Alibaba.