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Tech, Emerging Markets Turbulence Lift This ETF

ETF Professor

When things get rocky in emerging markets, some investors head for other pastures. Others embrace less volatile Taiwanese stocks and the iShares MSCI Taiwan ETF (NYSE: EWT) fit into the latter category.

The $3.14 billion EWT, which turns 20 years next year, is higher by 22.60% year to date, or more than double the returns of the MSCI Emerging Markets Index, in which Taiwan is one of the largest country weights after China.

Additionally, EWT has, as usual been the better bet on a risk-adjusted basis. Over the past three years, the Taiwan ETF's standard deviation is 83 basis points below that of the MSCI Emerging Markets Index.

Why It's Important

“Outside money, fueled by an easing of U.S.-China trade tensions, has helped boost Taiwan asset prices. The Taiex gauge rose 4.9% in October, its biggest monthly gain since 2012. The Taiwan dollar has strengthened to levels not seen since mid-2018,” according to Bloomberg.

For its part, EWT is coming off an October gain of 7.27% and closed just 0.89% below its 52-week high on Thursday. Technology exposure explains EWT's bullishness. While many single-country emerging markets ETF slog along, burdened by heavy weights to banks and energy stocks, EWT allocates 54.39% to technology names.

EWT also embodies the strength seen in semiconductor stocks this year. Taiwan Semiconductor (NYSE: TSM), the chip foundry to many of the world's top semiconductor makers, accounts for over 24% of EWT's weight, more than quadruple the weight assigned to the fund's second-largest holding.

What's Next

Data confirm that foreign investors scooping of shares of Taiwan Semiconductor has been a spark for Taiwanese equities.

“The key for the gains has been overseas investors buying about $3.1 billion of Taiwan Semiconductor Manufacturing Co. shares, or nearly half of the total equity inflows,” according to Bloomberg.

Although EWT is flow negative this year, it appears investors are revisiting the fund as highlighted by fourth-quarter inflows of $114.28 million.

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