IPOs

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With Alibaba Group Holding ’s IPO, many individuals will end up owning a piece of the Chinese e-commerce giant through the funds in their investment portfolio.

Actively managed funds may acquire shares in the offering and possibly will buy even more after the shares start trading on Friday. Investors in funds typically won’t know about those positions until the fund’s next report of its holdings—and only if the shares are still in the fund portfolio on the date for which the holdings are reported.

However, investors who primarily own index mutual funds and index exchange-traded funds should know that those funds generally wont be buying the new shares. That applies to both U.S.-focused index funds and, surprisingly, to ones that track China as well.

That’s because of Alibaba’s unusual structure: Though the stock is listed in New York, the company is incorporated in the Cayman Islands and the vast majority of its business takes place in China.

The makers of the S&P 500 index—the U.S.’s most widely tracked stock benchmark—declared earlier this month that Alibaba would be considered a Chinese company for categorization purposes. So Alibaba won’t be included in the S&P 500, even though by market value it would rank among the 25 largest companies in that index.

That means ETFs such as the SPDR S and iShares Core S won’t own the stock.

The Chinese e-commerce giant also won’t be eligible for the Nasdaq 100 index, which is among the most popular technology-focused indexes and is the benchmark for the PowerShares QQQ ETF. That’s because Alibaba chose to list on the New York Stock Exchange rather than on the Nasdaq Stock Market.

Meanwhile, the most widely followed emerging-markets and China indexes, operated by MSCI and FTSE Group, won’t include Alibaba as a Chinese company because it is listed and incorporated outside of that country. So ETFs including iShares MSCI China and Vanguard FTSE Emerging Markets won’t have Alibaba.

Alibaba doesnt fit into the indexing framework at FTSE and MSCI so it kind of just gets lost, said Patricia Oey, a senior analyst at researcher Morningstar.

To be sure, Alibaba’s status in the FTSE and MSCI indexes could change in the future. The companies have faced criticism for excluding U.S.-listed Chinese companies given that some of those companies—a group that includes Internet-search giant Baidu—are what many investors would want in a China portfolio. MSCI said earlier this month that it is considering possible changes to its methodology.

Still, Alibaba won’t be a complete orphan from indexes. At some point, it will show up as a Chinese stock in S&P indexes, such as the one tracked by the SPDR S&P China ETF.

However, McGraw Hill Financial ’s S&P Dow Jones Indices isn’t saying when it might actually add the stock, and that process has taken months with some other IPOs, said Dennis Hudachek, a senior analyst at researcher ETF.com.

A spokesman for S&P Dow Jones Indices noted that S&P global stock indexes are rebalanced on the third Friday of each calendar quarter. “Now it is just a question of when is the best time to add Alibaba while keeping market volatility to a minimum,” he said.

Russell Investments may still include the stock in its global indexes as well, with the decision to be announced in December. That could affect ETFs including the Schwab Fundamental Emerging Markets Large Company Index ETF .

Meanwhile, there are at least a few ETFs that are likely to add Alibaba shares within days or a few weeks.

That includes two IPO-focused ETFs: the First Trust U.S. IPO Index Fund and the Renaissance IPO ETF. The stock will be in the First Trust fund’s benchmark index as of Friday. It will be eligible for the Renaissance fund within several days and is likely to be the ETF’s largest holding, according to Renaissance.

Another early ETF holder, according to Mr. Hudachek, will be the KraneShares CSI China Internet ETF. Alibaba shares will be eligible for inclusion in that fund within two weeks, and Mr. Hudachek says he expects the stock to be added fairly quickly.