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Small ETFs stand to gain in first days after Alibaba IPO

By Ashley Lau

CHICAGO, Sept 17 (Reuters) - For a handful of U.S. exchange traded funds, Alibaba's initial public offering has the potential to be a bonanza: they can make the Chinese e-commerce company available to investors in as little as a few days, unlike some of their larger rivals, which may need months.

That means U.S. investors not wanting to own the company directly can get a piece of the action shortly after Alibaba begins trading on Friday, Sept. 19, on the New York Stock Exchange.

These ETFs include two funds from boutique asset manager Kraneshares, a specialists in Chinese stocks, and two from ETFs that specialize in initial public offerings. They use a "fast track" method that allows the funds' indexes to add the stock in a matter of days, instead of waiting for the rebalancing of major equity indexes, typical done quarterly or semi-annually.

The First Trust U.S. IPO Index Fund, which tracks the IPOX-100 U.S. Index and has assets under management of $519 million, will be the first to add Alibaba, with its underlying index adding the stock after Friday's market close, according to First Trust spokesman Stephen Yock.

The Renaissance IPO ETF, which launched in October 2013 and manages assets valued at $29 million, will add Alibaba five days after the IPO. Renaissance principal Kathy Smith said she has already seen a lot of interest from investors.

Because Alibaba expected to have a large market capitalization, "it will probably be a big part of the portfolio," she said.

KraneShares CSI China Internet ETF, with $103 million in assets under management, is set to add Alibaba 11 days after the IPO. This ETF increased assets by 25 percent in August - its biggest monthly inflow since January, according to Thomson Reuters Lipper data, and has already seen investor interest as well.

Bob Kleiber, a Parsippany, New Jersey adviser, bought the fund a few weeks ago. He said the exposure to Alibaba will convey "a huge advantage" to the ETF and the other companies in it.

Alibaba is an especially big grab for these small funds because many of the larger funds that track broad Chinese or emerging market indexes are not yet set to add Alibaba as the stock's U.S. listing and incorporation in the Cayman Islands have created a classification conundrum for many major index providers.

If and when providers decide to include Alibaba in broader indexes, it could be a while before the indexes and the funds tracking them actually add the holding.

Stock index provider MSCI Inc is discussing changing its rules so that companies such as Alibaba can be included in its global indexes, but any changes would not take effect until 2015.

"With broader indices, it usually takes months for an IPO to be included," said Dennis Hudachek, a senior analyst with ETF.com. "Some of these smaller, theme-specific indexes can add them in a couple of weeks."

The other KraneShares ETF set to add Alibaba, also 11 days after the IPO, is the KraneShares CSI New China ETF, which manages assets totaling $3.4 million.

KraneShares managing director Brendan Ahern said he first started looking into Alibaba in March 2013 even before his funds launched and that its potential to go public was a large part of his decision to create KWEB.

(Reporting by Ashley Lau in Chicago; additional reporting by Jessica Toonkel in New York; Editing by Linda Stern and Steve Orlofsky)