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Will Apple Be Able to Drive Taiwan ETFs Higher?

Taiwan stocks seem to have the wind at their back. The country’s equity market touched the highest level since May 2015 in mid-February. A pickup in economic growth bolstered by higher demand for electronics, Trump’s conformity to ‘One China’ policy toward Taiwan and a recent run in Apple shares led to the gains.

Taiwan ETF iShares MSCI Taiwan Capped EWT is up 11.5% so far this year (as of February 22, 2017). The economy has raked in about $2.5 billion in foreign investment this year, the highest compared with any big economy in Asia, as per Bloomberg (see Asia-Pacific (Developed) ETFs).

Why Is Apple Important to Taiwan?

Theappeal 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 hitting all-time highs almost on a regular basis, courtesy of upbeat earnings result and the hype around the upcoming iPhone 8, Taiwan semiconductor stocks have been big beneficiaries. Most analysts are resorting to an upgrade in price target (read: Take a Bite Out of Apple with These ETFs).

The Taiwanese economy grew 2.88% year over year in Q4, higher than a preliminary 2.58% growth and an upwardly revised 2.12% expansion in Q3. The 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 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 market and Asia-Pacific equity ETFs, FTW and EWT can come across as better bets, thanks to their sole focus on Taiwan.

EWT in Focus

This ETF invests about $2.73 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 about 9% share. However, the rest of the stocks have about a 3% share. Sector-wise, EWT relies heavily on information technology (56%), financials (18.3%) and materials (10.5%). The fund charges an expense ratio of 64 basis points (read: Time to Buy Taiwan ETFs?).

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 41 stocks with each security holding less than 4.57% of the assets.

Information technology takes the top spot at 48.16% in terms of sectors, followed by financials (27.5%) and materials (12.5%). The fund has amassed just $3.4 million in its asset base and trades in a paltry volume of roughly 1,200 shares. Expense ratio comes in at 0.80%. The fund is up about 11% in the year-to-date period (as of February 22, 2017).

Bottom Line

While both funds have surged almost the same from a year-to-date perspective, we suggest investors should go for EWT given its huge exposure in Taiwan Semiconductor and Hon Hai. These companies are believed to score higher on Apple’s new launch.

Though the economy runs risks of Trump’s anti-outsourcing policy, it is still too early to feel the pinch. As of now, the funds may see some gains (read: Foreign ETFs to Win or Lose on Trump Victory).


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Apple Inc. (AAPL): Free Stock Analysis Report
 
FT-TAIWAN (FTW): ETF Research Reports
 
ISHRS-MS TAIWAN (EWT): ETF Research Reports
 
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