Why $6.2 Billion Could Flow Into Shares of Alibaba in One Day – From Just Two Buyers

Editor's note: WeChat is China's "do-everything" app for video games, mobile payments, and everything in between.

But it's not the only huge story in China today.

Today's Masters Series essay originally appeared in the August issue of True Wealth China Opportunities. In it, Steve shares a startling fact about Alibaba – the world's largest retailer, and one of the biggest publicly traded companies on the planet. And while the numbers may be slightly outdated, the opportunity remains as valid as ever today...

Why $6.2 Billion Could Flow Into Shares of Alibaba in One Day – From Just Two Buyers

In 2006, Jonathan Krane was significantly responsible in bringing the Rolling Stones to China. He's also the founder of KraneShares, the top China-specific fund manager in the U.S. for exchange-traded funds (ETFs).

He recently returned from another two weeks in the country. And what he told me when he returned shocked me...

Krane was in Beijing, Shanghai, and Hong Kong – and he wasn't there on vacation.

I wanted to get the firsthand account of his recent trip. So I spent a couple hours meeting with him at his KraneShares office near Rockefeller Center in New York.

KraneShares now has two of the top five largest China ETFs in America. And one of them is the top-performing China ETF this year.

As we sat in the conference room overlooking Rockefeller Center, Krane and his chief investment officer Brendan Ahern shared an important insight that shocked me and that I had to pass along to you...

Why $6.2 Billion Will Flow Into Alibaba – From Just Two Buyers

Brendan Ahern of KraneShares sometimes describes himself as an "index nerd."

While you and I might read the football scores over the weekend, Brendan reads the latest 100-page changes in index methodologies from the big stock-index providers.

It's incredibly dry reading. But Brendan discovers some extraordinary stuff in there...

His latest discovery is what's about to happen to what he calls the China "index orphans."

What's an index orphan? It's a huge company that's not part of a benchmark index yet. But when it gets adopted by a major index, a lot of money is forced to flow into that stock.

It's a technical point – but it means real money. China's Alibaba (BABA) is a great example.

Alibaba is the seventh-largest company in the world by market value – with a market cap of about $400 billion. (It's the largest non-U.S. public company in the world.)

But as Brendan explained, Alibaba is missing from some of the major indexes...

It's the seventh-largest stock in the world, so it's clearly an important stock.

It trades in the U.S. So does Alibaba belong in the U.S. benchmark index – the S&P 500? I don't think so. It's not a U.S. company.

But where does it belong?

The world's No. 2 index provider has come up with an answer...

Index provider FTSE Russell currently doesn't include U.S.-listed Chinese companies in its China indexes. But that's about to change...

According to Brendan, FTSE Russell is about to include companies like Alibaba in its China indexes, its emerging markets indexes, and its global indexes.

This is a big deal...

As Brendan explained to me, the largest emerging markets ETF – the Vanguard FTSE Emerging Markets Fund (VWO) – has $80 billion in assets. Its largest holding is Tencent (TCEHY), with roughly $3.5 billion worth of Tencent shares.

Brendan rightly explained that "because Alibaba is roughly the same size as Tencent, the Vanguard index fund ought to have to buy roughly the same amount as Tencent."

If he's right, that's $3.5 billion that will have to flow into Alibaba – all because of one buyer.

But it's not just the Vanguard FTSE Emerging Markets Fund...

The Vanguard Total International Stock Fund (VXUS) is three times the size of VWO – with roughly $300 billion in assets. Tencent is one of the top five holdings in this fund. This fund holds about $2.7 billion of Tencent. Therefore, Brendan says this fund will have to buy about $2.7 billion worth of Alibaba.

That's $6.2 billion that will have to flow into Alibaba – in just two funds. Typically, this type of transition happens in one day. One day, the stock is out of the index... The next day, it's in it. But a $6.2 billion purchase by two funds in one day is a bit crazy.

So FTSE has said the inclusion of U.S.-listed Chinese companies will take place in four tranches: September and December 2017 and March and June 2018. It rebalances its indexes when the markets open on Monday, September 18. That means asset managers benchmarked to FTSE's indexes need to trade at the close on Friday, September 15.

The story is much bigger here, too...

We're not just talking about one stock (Alibaba), one index provider (FTSE Russell), and two Vanguard funds... This is a big story – with a lot of money heading into other index-orphan China stocks, including JD.com (JD) and CTRIP.com (CTRP).

Good investing,

Steve Sjuggerud

Editor's note: Steve just discovered an incredible opportunity for investors in Chinese stocks. It could usher in a new age of innovation and wealth creation. It's already underway, but Steve says the big gains are just getting started...

Learn more about this opportunity – and how to claim lifetime access to Steve's True Wealth China Opportunities newsletter for less than the regular price of a single year – right here.