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One place you won't get Alibaba: The big ETFs

Alibaba headquarters in Hangzhou, China.
ChinaFotoPress | Getty Images
Alibaba headquarters in Hangzhou, China.

Alibaba's blockbuster debut as a publicly traded stock has been everywhere leading up to Thursday's rollout. One place it won't be, though, is in a lot of investor portfolios.

That's because the e-commerce giant won't be included in the biggest exchange-traded funds that normally would list a company like Alibaba.

Because it is incorporated in the Cayman Islands and will only have American depositary receipts listed in the U.S., it will be ineligible for big indexes like the ones run by MSCI and FTSE.

While its exclusion from widely followed ETFs is unlikely to deter investor enthusiasm for Alibaba once the initial public offering hits Friday, it could have longer-term ramifications.

"There are many investors who explicitly or implicitly follow indices," said Nicholas Colas, chief market strategist at New York-based brokerage ConvergEx. "Not having Alibaba in an index to some degree limits the number of buyers or potential follow-on holders after the deal closes."

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Spokesmen for both MSCI and FTSE confirmed to CNBC.com that Alibaba will not appear in any of the flagship indexes such as the iShares MSCI Emerging Markets or the Vanguard FTSE Emerging Markets funds. The company likewise will not find itself in the biggest tech ETF, the $47 billion PowerShares QQQ Trust, which tracks the Nasdaq and is the most widely traded tech ETF and the fifth-largest overall, because Alibaba will list on the New York Stock Exchange.

The Vanguard FTSE index is the fourth-largest overall, and the corresponding MSCI index is seventh.

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The vast majority of ETFs in the $1.9 trillion industry are constructed passively, meaning they simply follow indexes, and many of the most popular ones for foreign-based companies are tied to the MSCI and FTSE indexes.

In the FTSE case, the firm will not include Alibaba because it will be trade as an ADR rather than common stock. For MSCI, the rules are not quite as strict and Alibaba likely will make its way into at least one of the company's indexes, though not the most widely traded ones.

MSCI spokeswoman June Tang said Alibaba will be included in the Overseas China Index as long as it meets certain conditions. According to a company statement, it must: "As of the close of its first or second trading day, its company full market capitalization is to be at least 1.8 times the MSCI China Interim Market Size-Segment Cutoff and its free float-adjusted market capitalization is to be at least 1.8 times one-half of the MSCI China Interim Market Size-Segment Cutoff."

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The company otherwise must meet two of three requirements for consideration: Be headquartered in China, derive at least 50 percent of its revenue from China, or have at least 50 percent of its assets in China.

Alibaba won't be completely locked out of FTSE, either. It will be eligible for lower-profile indexes including the FTSE China N Share Index, the FTSE Global R/QFII Index Series, the FTSE US Total Market Index Series and the FTSE Renaissance Global IPO Index Series.

From a bigger perspective, Colas wondered whether the Alibaba case might push indexers to change their rules.

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"At the margin you'd prefer to have this kind of company in some broadly followed indices, because it creates institutional buying demand and it creates stable holders," he said. "The fact that they're saying it won't be in many indices, or broadly followed indices, it raises the question of what indices are supposed to do."

—By CNBC's Jeff Cox