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What's Causing the Surge in Taiwan ETFs?

Sanghamitra Saha

Taiwan stocks have been in great shape lately. The country’s equity gauge – Taiex index – topped the 10,000 mark for the first time in 17 years lately. An outstanding rally in global tech shares made this possible as Taiwanese equities have attracted $7.3 billion in foreign inflows since January 1. Taiwan is Asia’s most prominent hub for foreign money inflows this year, as per an article published on Bloomberg.

The appeal of Taiwanese technology companies seems to be the main reason for the surge. Taiwanese semiconductor companies like Taiwan Semiconductor (TSMC) and Hon Hai caught attention for manufacturing equipment for the likes of Apple (AAPL), Sony and Nokia.

Now that Apple shares are hovering at record valuation, courtesy of upbeat tones by Warren Buffett, the highly optimistic report from analyst Brian White of investment firm Drexel Hamilton and overall bullish sentiments about the iPhone maker, Taiwan semiconductor stocks have been big beneficiaries. Notably, Apple emerged as the first U.S. company with a market cap of over $800 billion this week (read: A Feast of ETFs with Apple on Plate).

Apart from Apple, fast rollout of new models by phone makers in South Korea and China have a direct exposure to the component makers from Taiwan, “whose expertise and the economies of scale have helped them hold off fierce competition from parts makers elsewhere in Asia,” as per an article published on Financial Times. This clearly explains the rally in the Taiex index. Notably, the index is heavy on Taiwan Semiconductor and Hon Hai Precision.

The Taiwanese economy in fact reflected “the best performance in almost two years in the final quarter of 2016.” The economy is export-oriented and mainly focuses on technology-related products. Now, with an improving global economy and higher demand for gadgets and smartphones from various brands in emerging markets, tech-component companies are likely to soar (read: Will Apple Be Able to Drive Taiwan ETFs Higher?). 

ETF Choices

Given the recent rally in the Taiwanese market, investors might consider ETF plays from the space. While Taiwan has a substantial share in various emerging markets and Asia-Pacific equity ETFs, FTW and EWT can come across as better bets, thanks to their sole focus on Taiwan (see all Asia-Pacific (Developed) ETFs here).

iShares MSCI Taiwan Capped EWT

This ETF invests about $3.46 billion of its assets in 91 securities. However, with over one-fifth of the total exposure being on a single company, Taiwan Semiconductor, EWT has significant concentration risk.

Hon Hai takes up the second position in the portfolio with 9.75% share. However, the rest of the stocks have about a 3% share. Sector-wise, EWT relies heavily on information technology (57.8%), financials (17.4%) and materials (9.5%). The fund charges an expense ratio of 64 basis points.

First Trust Taiwan AlphaDEX Fund FTW

This fund targets the Taiwan stock market and tracks the Nasdaq AlphaDEX Taiwan Index. The fund has a basket of 40 stocks with each security holding less than 5.78% of the assets.

Information technology takes the top spot at 50.5% in terms of sectors, followed by financials (26.8%) and materials (11.5%). The fund has amassed just $3.5 million in its asset base. Expense ratio comes in at 0.80%.

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FT-TAIWAN (FTW): ETF Research Reports
ISHRS-MS TAIWAN (EWT): ETF Research Reports
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