I was reading an article about Alibaba Group’s (NYSE:BABA) Investor Day 2019. I couldn’t help but notice how many pies the e-commerce company has got its hands in. It’s truly a massive business influencing a majority of the Chinese population.
At the end of August, I said the following about Alibaba stock regarding its first-quarter earnings report:
BABA finished Q1 with $30.7 billion of cash and cash equivalents. At the moment, it has plenty of momentum in all of its businesses and the cash necessary to keep those plans moving ahead.
With or without a Hong Kong listing, BABA stock will be a long-term winner.
For context, the article discussed what damage, if any, would come from postponing its secondary listing of BABA stock on the Hong Kong Stock Exchange. I surmised that it would be nothing but a blip for one of China’s largest and most successful businesses.
For me, Alibaba Group has so many irons in the fire generating so much cash flow. It’s starting to seem like it’s too big to fail. And if that’s the case, owning BABA stock on its own should be a relatively low-risk investment.
But what I’ve learned from writing about investments for a decade-plus is that there’s no sure thing in life. I’ve said it before: ask any successful investor whether they get paid to invest or merely do so to grow their family’s retirement portfolio, and they’ll tell you about the skeletons in the closet.
So, you might think Alibaba stock is a no-brainer. But you never truly know if a long-term hold is going to turn into a 10-bagger or end up costing you both time and money.
For those who like to hedge their bets, I believe the following three exchange-traded funds make perfect sense. Here’s why:
It Starts with Asia
China of course is the world’s second-largest economy. However, I don’t think it makes sense to own an ETF that’s too heavily weighted there. Simply put, the current trade war with the U.S. is a major risk factor.
The Schwab Emerging Markets Equity ETF (NYSEARCA:SCHE) has 1,348 total holdings and $5.9 billion in assets. China has the highest country weighting at 33.7%. Taiwan and India come in second and third place at 12.1% and 11.4% weightings, respectively.
Other countries in the top 10 include Brazil, South Africa, and Russia.
As for the ETF’s top 10 holdings, Alibaba stock is the number one holding with a weighting of 5%. The only other stocks with a weighting over 2% are Tencent Holdings (OTCMKTS:TCEHY), also at 5%, and Taiwan Semiconductor (NYSE:TSM) at 4.2%.
Almost one-third of the stocks in the portfolio have market capitalizations exceeding $70 billion. Another third represents market caps between $15 billion and $70 billion. This gives you a diversified portfolio of mid- and large-cap stocks.
I realize that a 5% weighting isn’t much if you’re long BABA stock. But with a management expense ratio, or MER of 0.13%, it’s an excellent way to play the e-commerce company and the rest of the emerging markets.
A More Focused Portfolio
While SCHE provided over 1,300 stocks from the emerging markets, the Invesco BLDRS Asia 50 ADR Index Fund (NYSEARCA:ADRA) is diametrically opposite of SCHE. ADRA features just 50 holdings, including BABA at a weighting of 15.2%.
ADRA tracks the performance of the S&P/BNY Mellon Asia 50 ADR Index, a cap-weighted index that invests in 50 of the top Asian ADRs. It charges 0.30% annually.
If you thought SCHE invested in large-cap stocks, ADRA’s average holding has a market cap of $134.3 billion. ADRA features consumer discretionary, financials, and technology stocks accounting for 37.0%, 26.9%, and 14.6% of the fund’s assets, respectively.
In business since November 2002, the biggest negative with Invesco’s ETF is that it only has $17.0 million in total net assets. Also, its 30-day volume of just 384 shares or less than $12,000 in daily volume isn’t necessarily confidence inspiring.
If you’re concerned about liquidity, ADRA might not be for you.
E-Commerce Continues to Grow
We’ve established that online retail continues to gain market share. However, I believe we’ve also determined that while brick-and-mortar retail is changing, it will continue to be a big part of the retail landscape.
I think even former Alibaba Group CEO Jack Ma would admit this.
While Alibaba has a number of businesses in addition to online retail, it remains e-commerce that drives the company’s growth.
As a secular trend, the ProShares Online Retail ETF (NYSEARCA:ONLN) is a good choice. It offers exposure to Alibaba stock while maintaining some additional diversification.
The ETF’s marketing materials point out that although online retail accounts for about 10% of global retail sales, that’s expected to double by 2030. So, if by fluke Alibaba was to falter, you would still be invested in a rising tide.
With just 25 holdings — some of which are losing money — this is an ETF appropriate for more aggressive investors who are used to taking on a little more risk.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.