Alibaba Group Holding Ltd (NYSE:BABA) shares have rallied more than 64% from its IPO price of $68. By comparison, the iShares China Large-Cap ETF (NYSEARCA:FXI) has gained a meager 0.93% this year so far. If the ETF providers don’t change their rules to include Alibaba, they may risk losing investors, notes Steven Sears of Barron’s.

Alibaba Group Holding Ltd May Prompt ETF Changes

Why is Alibaba not included in FXI?

Following Alibaba’s blockbuster IPO, American investors have grown comfortable investing in Chinese stocks. This may prompt many exchange-traded funds (ETFs) tracking China to make changes to include Alibaba. BlackRock-owned iShares China Large-Cap ETF is a primary proxy of Chinese stocks. However, the Hangzhou-based company isn’t listed in China, so many index funds and ETFs haven’t included it.

A spokeswoman for BlackRock told Barron’s that the Jack Ma-led company was not eligible to join the iShares China Large-Cap ETF because it was listed as American Depository Receipts (ADRs) on NYSE. The BlackRock ETF’s main holdings include China Mobile, Tencent Holdings, China Construction Bank, Industrial & Commercial Bank of China, and PetroChina.

Now many index funds are considering changes to include Alibaba, but it’s still unclear when that’s going to happen. Investors who expect to see changes in the inclusion methodology are better off initiating a “risk reversal” strategy on ETFs. The strategy is of view that fund providers will change rules to include Alibaba and other Chinese companies with similar stock listing structures.

Alibaba’s inclusion inevitable

Lack of movement in the iShares China Large-Cap ETF indicates that it no longer reflects the evolving dynamics of Chinese economy. Among traders, it has lately become more like a bet on China’s housing and banking sectors. That perception may hurt FXI. Sears says Alibaba’s inclusion in the iShares China Large-Cap ETF is “inevitable.” But nobody knows when it’s going to happen. It’s a challenging issue because of the corporate structure of Alibaba. The online retailer’s structure allows Jack Ma and other insiders to appoint most of the board.

Alibaba shares fell 2.28% to $111.65 at 11:58 AM EST on Tuesday.