Investing in Alibaba: How to Start Profiting Today, Before the IPO

China's largest e-commerce company Alibaba is expected to go public later in 2014, but investors who want to profit from China's soaring e-commerce industry don't have to wait to make money.

China's e-commerce industry is the second-largest in the world. It's on track to overtake the United States as soon as 2016, according to eMarketer.

And market researcher McKinsey & Co. estimated in May 2013 that China's e-commerce market was a $210 billion industry in 2012 - and will hit $420 billion by 2020.

Alibaba will be at the heart of that industry.

Alibaba's network of websites - that operate like Inc. (Nasdaq: AMZN), eBay Inc. (Nasdaq: EBAY), and PayPal - account for more than 50% of the e-commerce that takes place in China.

Investing in Alibaba

That's why the Alibaba IPO has been valued between $100 billion and $150 billion. That compares to the IPO of Facebook Inc. (Nasdaq: FB), which valued the social media stock at $104 billion, and was the biggest Internet initial public offering (IPO) in history.

The IPO date for Alibaba has yet to be announced, but some speculate it could occur by the end of the first quarter.

Fortunately there's another way to make money today from China's multi-billion dollar e-commerce industry.

Investing in Alibaba Before It Hits The Market

Yahoo! Inc. (Nasdaq: YHOO) owns a 24% stake in Alibaba and has watched its stock climb nearly 80% in the last year. While that's one way for investors to get a piece of Alibaba, there are more direct investment opportunities available.

For many investors, exchange-traded funds (ETFs) that deal with one industry's best players are a great way to get into an IPO while minimizing risk.

That's why Money Morning's Defense & Tech Specialist Michael Robinson recently recommended an ETF to his subscribers that has captured gains as high as 450% in the last 15 months - specifically in the Chinese IPO market.

The fund is KraneShares CSI China Internet ETF (Nasdaq: KWEB), a broad play on these fortunes in China.

KraneShares has 30 Chinese Internet companies in its portfolio. These companies deal with everything from social media and gaming, to e-commerce, to real-estate Internet portals.

The fund's ability to locate the most profitable Chinese Internet companies has helped it gain 39% in the past year.

[rwc_chart_single name="KWEB"]

KWEB invests heavily in Tencent Holdings ADR (OTCMKTS: TCEHY), which accounts for 10% of the fund's holdings. Tencent offers online payments, social networks, gaming, advertising, music, and video to its customers. TCEHY has posted a 178% gain in the past two years.

Another major holding is SouFun Holding Ltd. (NYSE: SFUN), which controls a real estate and home improvement Internet portal in China.

"SFUN has simply crushed the overall U.S. stock market by a factor of nearly 10-to-1 over the past two years," Robinson said. "Even after a recent correction, shares are up nearly 380% compared with a two-year return of roughly 34% for the S&P 500."

Currently, KraneShares ETF doesn't have any stake in Alibaba. According to Robinson, however, Alibaba is just the kind of company KWEB likes to get involved with.

"Just look at what happened with YY Inc. (ADR) (Nasdaq: YY)," Robinson said. "The firm went public in December 2012, and KWEB got on board. In fact, the fund has invested 3.4% of its assets in YY, which despite the market's recent weakness is up nearly 450% since the stock began trading in the U.S."

Other notable holdings for KWEB include China's largest search engine Baidu Inc.(Nasdaq: BIDU), one of China's oldest e-commerce companies NetEase Inc. (Nasdaq: NTES), and a leading Chinese software company Qihoo 360 Technology Co. Ltd.(NYSE: QIHU).

KWEB isn't investing in Alibaba at the moment since the company has not yet hit the market, but Alibaba is exactly the type of company the fund likes in its portfolio.

Investors should expect KWEB to play the Alibaba IPO, and those looking to get in on Alibaba's IPO can buy KWEB before the e-commerce giant goes public.

What do you think about Alibaba's upcoming IPO? Will you be investing? Let us know on Twitter @moneymorning using #Alibaba.

There are huge profits to be made by investing in the bioscience industry. But first you need to avoid these pitfalls that trip up investors.