Market Overview

Not Just Twitter: Another IPO Could Jolt These ETFs

One of the bigger, recent news items pertaining to the Internet sectors were last week's reports that social media firm Twitter has filed plans for an initial public offering.

Although Twitter may currently have less than $1 billion in annual revenue, estimates for the company's post-IPO valuation range from $10 billion to $20 billion.

That is enough to get bankers and investors excited. News of Twitter's IPO has stoked some fervor in the ETF world with talk of what ETF will be the first to include Twitter. Answer: It is likely to be the Global X Social Media Index ETF (NASDAQ: SOCL).

Related: Global X Social Media ETF Will Add Twitter After IPO.

Twitter is not the only big-name Internet company that is looking to go public. Alibaba Group Holding's, the Chinese e-commerce giant, is looking to go public as well and by most accounts, this IPO will dwarf Twitter in size. Actually, the Alibaba IPO, which could value the company at $70 billion, could be the biggest global tech IPO since Facebook's (NASDAQ: FB) last year.

Alibaba may not be familiar to every American investor or Internet user, but its IPO, like Twitter's, has the potential to affect a few ETFs. Noteworthy is that the logical ETF destinations for an Alibaba IPO are among the best-performing China funds this year. While the usual suspects among China ETFs have recent awakened from their slumbers, tech/Internet funds such as the Guggenheim China Technology ETF (NYSE: CQQQ) have been stellar performers all year.

CQQQ is up 37.4 percent year-to-date while the rival Global X NASDAQ China Technology ETF (NASDAQ: QQQC) has surged 39.4 percent. Although it is not a pure play tech ETF, the PowerShares Golden Dragon China Portfolio (NYSE: PGJ) devotes 53.5 percent of its weight to that sector, enough to have powered the ETF to a 40.6 percent year-to-date gain. Seven of PGJ's top-10 holdings are Chinese Internet stocks.

Where Does Alibaba Go?
Any of these ETFs and others make for logical destinations for Alibaba shares at some point. Even SOCL, the social media ETF, could accommodate Alibaba. It is often forgotten that SOCL is designed to capture a global view of the social media industry and as such, the U.S. accounts for less than half the fund's weight. China is SOCL's second-largest country weight at nearly 28 percent.

What is likely to be the determining factor in which ETFs Alibaba finds a home is where the company decides to list its shares. The company reportedly has a preference for a Hong Kong listing, but that is not foregone conclusion. Alibaba would like to institute a dual-class share structure so founder Jack Ma and other insiders retain control of the company's voting shares.

Other big-name Internet companies, including Facebook, Google (NASDAQ: GOOG) and Baidu (NASDAQ: BIDU), have made similar moves, but that structure is not allowed in Hong Kong. So Alibaba is proposing a system whereby Ma and other top executives can nominate five of the nine board members, according to the Wall Street Journal.

If regulators in Hong Kong approve Alibaba's plan for nominating board directors, it seems likely the company will proceed with a listing there. That could reduce the number of U.S. ETFs in which the stock makes an appearance.

While CQQQ, PGJ, QQQC and the newly minted KraneShares CSI China Internet ETF (NASDAQ: KWEB) have been powered higher by U.S.-listed names like Baidu, Ctrip.com (NASDAQ: CTRP), Sina (NASDAQ: SINA), Qihoo 360 Technology (NASDAQ: QIHU) and others, where Alibaba lists is going to have an impact on what ETFs hold it.

PGJ holds primarily ADRs, hence it is the only one of the aforementioned ETFs that does not have exposure to Tencent Holdings, China's largest Intenet company. CQQQ's index is "designed to measure and monitor the performance of the universe of publicly-traded companies which are based in mainland China, Hong Kong or Macau," according to Guggenheim, so that ETF makes for a logical destination for Alibaba.

If Alibaba does maintain or exceed a $70 billion valuation, it would likely become one of the largest holdings in CQQQ, QQQC and the new KWEB. Those ETFs have weights to Baidu of 11.3, 10.4 and 9.7 percent, respectively. Baidu has a market cap of just over $50 billion.

For investors eagerly awaiting the Alibaba IPO and the chance to use these ETFs to profit from that event, there is some bad news: The IPO may not even happen this. Alibaba has not even selected investment banks to lead the offering. Due to that and various regulatory hurdles, observers see a New York IPO happening this year as almost impossible and a Hong Kong IPO before year-end as unlikely, Reuters reported.

For more on ETFs, click here.

Disclosure: Author does not own any of the securities mentioned here.

Posted-In: Long Ideas News Sector ETFs Short Ideas Emerging Markets Emerging Market ETFs IPOs Markets Best of Benzinga

 

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