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Alibaba Buys South China Morning Post: ETFs to Watch

Zacks Equity Research

The Chinese e-commerce giant Alibaba is apparently boosting its presence into media-related business. The company agreed to buy Hong Kong’s leading newspaper South China Morning Post (SCMP) on Friday for $266 million. Financial terms of the deal are yet to be disclosed. In a statement, Alibaba said that the deal would include, in addition to the leading publication, SCMP’s magazine and recruitment newspapers.

The company had given hints of its interest in media business over the past few months. Alibaba had helped to set up the media company CMC Holdings after buying a sizable portion in one of China’s most prominent business media companies in June.

Whatever the case, many investors are speculating that reporting by SCMP, an English-language paper, may get diluted under the influence of its mainland Chinese acquirer, per the source.

The acquired entity SCMP Group has been reeling under pressure in recent years, thanks to profit declines amid growth of free online publications. Its most recent semiannual profit would have plummeted over 40%, per Bloomberg. Moreover, Bloomberg indicated that shares of SCMP have been suspended since February 2013 after it failed to have 25% shares held by its minority investors. Notably, 25% is the minimum share that a company must vest in its minority investors to trade in Hong Kong.

ETF Impact

Investors should note that no investor enthusiasm was felt following the deal as Alibaba shares lost over 5.4% on December 11 along with the broader Chinese market. Alibaba shares were down over 0.1% after hours as well. Moreover, Alibaba shares are off 23.3% so far this year (as of December 11, 2015).

Below, we have highlighted five ETFs having heavy exposure to Alibaba. The ETFs could be in focus this week and in the next as this online behemoth has been diversifying its empire slowly and steadily. However, since the Chinese market is immensely volatile, investors can take the basket approach to avoid risks associated with a single stock pick (read: Alibaba ETFs Set to Surge on Blockbuster Q2 Results).

Guggenheim China Technology ETF (CQQQ)

This fund targets the overall technology sector in China and follows the AlphaShares China Technology Index. Holding 76 stocks, Alibaba occupies the top position in the basket with 21.5% share. In terms of industrial exposure, about two-thirds of the portfolio is allotted to Internet mobile applications while electronic components, semiconductors, and technology hardware & storage rounding off to the next three spots.

The product manages an asset base of $57.2 million and trades in a small volume of around 20,000 shares a day. Expense ratio comes in at 0.71%. CQQQ has added 2.34% so far this year (as of December 11, 2015). The fund was down about 3.3% on December 11, 2015 (see: all the Technology ETFs here).

KraneShares CSI New China ETF (KFYP)

This fund tracks the CSI China Overseas Five Year Plan Index, holding 150 securities in its basket. Out of these, Alibaba takes the second spot at 15.5%. The fund is skewed toward technology (46.1%) followed by consumer discretionary (19.56%) and Industrials (15.3%).The fund is unpopular and illiquid as depicted by its AUM of $3 million and average daily volume of under 500 shares. The fund charges 71 bps in fees and the product has lost about 2.8% (as of December 11, 2015).

Renaissance IPO ETF (IPO)

This ETF follows the Renaissance IPO Index, which holds the largest and most-liquid newly listed U.S. initial public offerings. Currently, the product holds 69 securities and BABA takes the top spot in the basket with a substantial 10.56% of assets. From a sector look, technology stocks make up for about 30% share while financials and consumer discretionary make up for double-digit exposure each. The fund has attracted $20 million in its asset base and sees a paltry volume of about 6,000 shares per day on average. It charges 60 bps in fees per year and lost over 3% on the day. The fund is down 4.5% in the year-to-date frame.

KraneShares CSI China Internet Fund (KWEB)

This product provides concentrated exposure to the Chinese Internet market by tracking the CSI China Overseas Internet Index. In total, the fund holds about 60 securities in its basket with Alibaba occupying the second position at 9.5%. The technology sector makes up for a substantial 57.1% of total assets, while consumer discretionary takes the remainder with just 42.1% allotted to industrials.

The ETF has amassed $155.8 million in its asset base and charges 71 bps in annual fees from investors. Volume is good as it exchanges 153,000 shares in hand per day. KWEB lost 3.3% in the past trading session.

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