AMZN - Alibaba Splits 6 Ways: A 6-Pack Of ETFs To Consider

2023-03-29 17:19:39 ET

Summary

• BABA thrilled the global stock markets by announcing plans to split into six different companies.
• As an ETF wonk, that prompted me to drill down to identify a variety of ways to capitalize on further BABA success, via ETFs that own it.
• I think my six-pack of ideas has something for everyone interested in BABA, China or Asia more broadly.
• Making the cut: ONLN, PGJ, AIA, AAXJ, KWEB, FXI.

Well, that was exciting. On Tuesday, Alibaba Group Holding Ltd (BABA) thrilled global equity investors by announcing it is splitting into six main businesses, essentially spinning out its six main businesses into individual listed companies. I'll leave the detailed analysis of that announcement, and the future execution of BABA's plan, to the equity analyst-types on Seeking Alpha and elsewhere. My focus is on ETF investing, and starts with research. And in this case, I was naturally intrigued to see how to capitalize on this announcement. But first, a little perspective.

This appears to be long-term positive, not only for BABA but for Chinese and Asian equity markets. This is not only because there will soon be six different ways to invest in this behemoth's future success, but also because BABA is such a large part of so many ETFs that invest in China, or in Asia more broadly.

For many investors, the love/hate relationship with Chinese stocks continues

However, let's pause for a moment before I present and handicap my "six-pack" of different ETFs I have tracked for years that are suddenly benefiting from BABA's tailwind of an announcement. It seems like it was just weeks ago that China-based companies were a dirty word on Wall Street. In fact, one of them, TikTok, is in the bullseye of Congress right now. It's one of the few things both major US political parties seem to agree on. So, while there appears to be a good reward/risk tradeoff (my expression for "bang for your investment buck") in the adrenaline rush that the BABA news is currently causing, this is still a Chinese company we're talking about. So, like so much of today's indecisive stock market, my views on ETFs that I think can be used to participate in the post-BABA six-way spinoff event has to be viewed as having limited run, until proven otherwise.

That's the thing about bear markets: They get you excited for a day or a week or even a month or two. But by my count, we've had 20 false breakouts in the S&P 500 since early last year. That speaks to a market that's running on sugar-high after sugar-high, with plenty of potential headwinds that can push back against the best of news, eventually. So, as with just about anything I publish these days, I'm putting it into three distinct time frames. As it relates to these six ETFs that hold BABA:

Time frame matters...more now than ever

* The short term (weeks) looks like a strong reward/risk tradeoff. That is, all six of these have upside potential that's much greater than their risk of major loss. Sure a market "torpedo" can enter the picture at any time, with a banking crisis brewing and a host of pre-existing market conditions that make this as grizzly a bear market as I've ever seen. We just have not had the price plunge yet. But until that (likely sudden) downturn arrives, there are "tactical" opportunities in different market segments, like this one.

* The intermediate-term (months) is where I think the greatest trouble is (again, with the caveat that the torpedo can arrive at any time with macro conditions like these). So in 2023, the key phrase is "don't overstay your welcome...in anything equity-related." In other words, "risk-management" is rule No. 1. As such, I have laid out my opinions below with an eye toward that.

* The long term (years) looks good, as long as an investor can either avoid or ignore the big loss period that I believe is part of every bear market cycle. We all want to get on to the next bull, but you can't tell that to the market. It doesn't care.

With that in mind, let's take a look at where the reward/risk tradeoff looks most interesting and opportunistic to me right now. Of course, we'll do this through the eyes of the ETF marketplace.

I'll admit that I have just started using Seeking Alpha's ETF comparison tool... and I love it! This particular situation makes it a perfect fit for analysis that has, as its ultimate goal, to lay out a variety of favored ETFs, each of which is distinguished from the other five. There is so much diversity among ETFs that own BABA I didn't want to short-change this subject. So while I do have my personal favorites, I made sure to have a strong "honorable mention" list here, since I will never assume that any other investor is just like me. We're all investment "snowflakes," if you will. Here's a chart, summarizing them in the order in which I will describe my opinions below.

2 "Undiscovered" ETFs I like

The assets invested in ETFs are extremely packed into a very small number of funds. But as the saying goes, good things come in small packages. I find that to be the case with many ETFs whose asset size and marketing reach is dwarfed by the biggest, loudest ETFs. So, the first pair I like are ProShares Online Retail ETF ( ONLN ) and Invesco Golden Dragon China ETF ( PGJ ).

ONLN is not a China or Asia ETF at all. It's a smallish ($101mm AUM) fund that trades about $2mm a day in volume. It owns 27 stocks whose common theme is that their primary business is driving online commerce. As with many ETFs I like, I'm not looking for massive diversification because after a few dozen holdings, the benefits of spreading your risk diminish greatly. ETFs like ONLN are effective surrogates to get exposure to companies I want to own at a particular time, but with some built in diversification. Like I said above, risk-management plays a big role in all of this.

BABA is the second largest holding of ONLN. The biggest? Amazon.com ( AMZN ), at nearly a 25% allocation. BABA is around 12%, and just 10 stocks make up over 70% of this ETF. The China-ties to BABA are fine until the market changes its mind about something related to geopolitics. At that point, having AMZN as a "partner" at the top of this ETF appeals to me. ONLN satisfies the desire to own BABA because of its broader theme. The risk here, of course, is that by splitting into six separate companies, they may not all end up in this ETF. So the BABA presence may be diluted. For now, it is not, and that makes this little ETF very intriguing to me, short term and long term. As noted, the intermediate term is still a giant tossup on any idea I put forth. That's risk management for you!

PGJ is an ETF old-timer, with a nearly 20-year tenure. It was the first China-focused ETF I recall owning, not long after its 2004 debut. It has since been passed in asset size by many funds, and at about $220mm in AUM and only about $600,000 in daily trading volume, it's an ETF that clearly fits my "undiscovered" label... even though it was once pretty popular.

PGJ does not buy shares in the Chinese stock market, but rather owns Chinese companies that trade on US stock exchanges. Given all of the concerns about how China's government will conduct its business in the months and years ahead, that's a big plus for me. Now, the government could decide to do something drastic and disallow Chinese stocks to trade in the US. But as an ETF investor, the reaction can be as straightforward as entering a sell trade on your phone or computer. BABA is currently a 9% position in PGJ, so this is an ETF that can be used to get access to that one stock, but with 64 other stocks around it. Again, concentration of this ETF checks a friendly box for me. Over 60% of PGJ is comprised of 10 stocks. There's a lot of cyclical equity exposure here as well (nearly 50% of AUM), so the Chinese "reopening" theme should benefit this ETF.

ONLN and PGJ are my top recommendations for participating in BABA and the associated good tidings that may come from the impact that major announcement has on Chinese stocks, Asian equities and the online retail industry. For the rest of the investment snowflakes (a term of endearment to be clear), this pair of smaller ETFs may be a bit off the path. So, here are shorter summaries of my opinions on four other ETFs I follow, I've owned at some point over the years, and that I think are relevant to the BABA news, and any lift it provides to the Asian equity markets.

2 Diversified Asian ETFs I like

iShares Asia 50 ETF ( AIA ) and iShares MSCI All Country Asia ex Japan ETF ( AAXJ ) are my "core" go-to names in the diversified Asian equity ETF segment. They have been for a while. To be clear, my own investment style is a combination of buy-and-hold and tactical, with the latter dominating the former approach since late 2019, as the global equity markets peaked. In a bear market like this one, I just don't believe in being a hero and riding ETF holdings down 30%-70%. So, with that tactical disclaimer out of the way, here are a few key things to point out about AIA and AAXJ.

AIA is a concentrated equity ETF. How do we know? It says so in the fund name. This $1.6B ETF owns no Chinese mainland stocks. It gets its China exposure via accessing Chinese company stocks in both Hong Kong and Taiwan, with nearly 75% of AIA invested in those markets. So this is a China ETF with some Southeast Asian exposure added. This is the case with many Asian ETFs, given the dominant size of the China market within Asia. BABA is 7% of AIA, and there's a focus on four primary sectors. 35% is in Technology, and that sector plus Financials, Communication and Consumer Cyclical exposure add up to more than 90% of AUM. The top 10 holdings make up 60% of AIA, and view it as a solid core access vehicle for the China/Asia market.

AAXJ is about twice the size of AIA, but it looks similar in some ways. It also performs similarly much of the time, as shown below. BABA is not really a significant holding here, at less than 3%, so this is included my BABA six-pack primarily to alert investors to its wide reach across Asia. The performance differential between AAXJ and AIA is in part due to a 15% presence of stocks from India in the former, while the latter ETF ( AIA ) does not cover India. AAXJ is also less tech-heavy (23%) and is more wide spread across sectors. Actually, its current sector allocation is not too different from the S&P 500, despite completely different regional allocations. Most of the sector exposures between those two are within a handful of percentage points, except for Healthcare, which we know is a bigger segment of the US economy than in most global locales.

2 "Wildcard" China-linked ETFs I like

Lastly, I'll quickly point out a pair of China-only ETFs that are better known to investors. KraneShares CSI China Internet ETF ( KWEB ) and iShares China Large-Cap ETF ( FXI ) each have more than $5B in ETFs, making them among the largest in the China/Asia ETF segment. They both focus on owning Chinese stocks in the Hong Kong market, with FXI exclusively operating on those exchanges, and KWEB devoting about 80% of its AUM to Hong Kong-listed China businesses. These are both widely-covered on the Seeking Alpha platform, so my main commentary here is that they're both viable vehicles to access BABA (9% of FXI and 8% of KWEB) as part of whatever non-BABA exposure an investor chooses to surround that with. KWEB's concentration in Internet stocks has produced some dramatic price swings in both directions over the years. It's up 65% since we recommended it in late October last year, but it also has an 88% drawdown on its resume. So for BABA plus a ton of thrills, KWEB a China ETF choice for the risk tolerant.

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The 6-Pack, Summarized

So, there you have it. Two smaller ETFs, two Asia ETFs and two China-only ETFs. All of them currently own BABA, and we'll see which parts of the new BABA group of companies are still retained in each ETF.

I favor the undiscovered pair (ONLN and PGJ) because I like smaller ETFs for many purposes and for many reasons, as expressed above. But AIA and AAXJ are my two favorite "China-plus" access vehicles, and KWEB and FXI are focused, Hong Kong-driven China plays. The BABA news certainly has equity investors scrambling to dissect and discern what it means to that company, the China market (given its dominant position there), and by extension Asia and the rest of the global equity market. For those who, like me, prefer to hunt for ETFs to express our investment preferences, I hope this wide-ranging article helps introduce some perspective and ideas to delve into.

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