Two ETFs offer investors a way into Alibaba IPO

Strategic moves by two exchange-traded fund managers underscore the uniqueness of the stock.

By Jeff Benjamin

Sep 24, 2014 @ 11:40 am EST

With the dust still settling around last week's historic stock offering by Alibaba Group Holding Ltd. (BABA), two exchange-traded funds have tweaked their policies to include the new stock earlier than normal.

Some ETF managers are hoping Alibaba adds some appeal to their funds.

The $29 million Renaissance IPO ETF (IPO) has fast-tracked the record-setting stock offering to include Alibaba Friday, five market days after the $25 billion IPO.

Kathleen Smith, principal at Renaissance Capital, said the standard policy is to add newly public companies to the one-year-old ETF on a quarterly rebalancing schedule.

“Fast track exceptions are made when we see a product that is big enough and we believe would be a good candidate for the portfolio,” she said.

The $520 million First Trust US IPO ETF (FPX) took advantage of the time of the Alibaba offering, which coincided with the fund's quarter end, to add the new stock after the market closed on Friday.

Portfolio manager Josef Schuster said adding Alibaba was a rare exception, but not beyond the flexibility of the portfolio management rules.

“In 99.999% of the cases we have not done that, but adding a new stock on the first day of trading is consistent with our flexibility,” he said. “It was our rebalancing date, by coincidence.”

Mr. Schuster said this marks the first time in the fund's eight-year history that a stock was added on the day of the IPO.

“But this is also the first time we've had a significant IPO price on our rebalancing day,” he added.

The strategic moves by both ETF managers underscore the uniqueness of the Alibaba offering, a Chinese electronic-commerce company that is only trading on U.S. stock exchanges. And, because the company is not based in the United States, it is not expected to be added to most major market indexes, such as the S&P; 500.

The Alibaba IPO eclipsed the $22 billion raised by the Agricultural Bank of China in 2010, as well as the 2008 Facebook IPO, which raised $10.7 billion.

After being priced at $68, Alibaba shares closed it first trading day Friday at $93.89 per share, and has since fallen more than 7% to close Tuesday at $87.17.

Investors shut out from the initial offering now can buy Alibaba shares on exchanges for more concentrated exposure than they will get in either of the ETFs holding the stock.

Mr. Schuster said Alibaba has a 2.8% weighting in his fund, which is made up of 100 stocks, and typically rebalances quarterly.

Alibaba will be among the largest holdings in the Renaissance ETF, at 10%, when it is added on Friday. Twitter Inc. (TWTR), which went public last November, also has a 10% weighting in the fund of 72 stocks.

The Renaissance ETF has gained 7.5% from the start of the year, and the First Trust ETF has gained 9.6%. The broad market S&P; 500 is up 7.3% for the year through Tuesday.

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