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Time to Buy Taiwan ETFs?

Lopamudra Bhattacharya

Taiwan ETFs – iShares MSCI Taiwan Capped ETF EWT and First Trust Taiwan AlphaDEX Fund FTW – gained almost 2.4% and 2% in the last ten days (as of December 7, 2016) respectively, thanks to U.S. president-elect Donald Trump’s surprise call with Taiwan’s president Tsai Ing-wen. The call has sent the Taiwan stock market on a frenzy, owing to speculations about its growing importance and its emergence from China’s diplomatic and economic shadow (read: Will Emerging Market ETFs Shine Again Under Trump Regime?).

This is the first time since 1979 when the U.S. broke off diplomatic ties with Taiwan and recognized the People's Republic of China that an American leader has spoken to his Taiwanese counterpart.

Taiwan ETFs nosedived after the release of presidential election results on November 8, 2016 as seen in the chart below. This was due to conjectures that Taiwan, an outsourcing hub, may fall prey to Trump’s limiting policies. Higher tariffs on imports or likely loss of manufacturing jobs may put pressure on Taiwan ETFs. Additionally, the prospect of a major tax cut, huge government spending and fiscal stimulus are driving the U.S. bond yields higher and strengthening the U.S. dollar. This scenario increases the allure of U.S. funds and thus has a negative impact on emerging market investing (read: Foreign ETFs to Win or Lose on Trump Victory).

However, the products soon staged a recovery propelled by the possibility of Trump revolutionizing U.S. foreign policy for Taiwan.

Given this, equity ETF plays in this market will be in focus. While Taiwan has substantial representation in various emerging markets and Asia-Pacific equity ETFs, FTW and EWT should particularly be on investors’ radar, thanks to their sole focus on Taiwan (see all Asia-Pacific Developed ETFs here).

EWT

This ETF looks to track the MSCI Taiwan 25/50 Index. The fund invests about $2.8 billion of its assets in 91 securities. However, with over one-fifth of the total exposure being in a single company, Taiwan Semiconductor, EWT has significant concentration risk. The fund trades in an impressive volume of almost 3.8 million shares on an average.

Hon Hai takes up the second position in the portfolio with about 8.6% share. However the, rest of stocks have less than 3% exposure. Sector-wise, EWT relies heavily on information technology (54.6%), financials (18.6%) and materials (10.4%).

The fund charges an expense ratio of 62 basis points. EWT is up about 22.4% so far this year (as of December 7, 2016). EWT currently has a Zacks ETF Rank #3 (Hold) with a Medium-risk outlook.

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 4.7% of the assets.

Information technology takes the top spot at 54.6% in terms of sectors, followed by financials (18.4%) and consumer staples (7.3%). The fund has amassed just $3.1 million in its asset base and trades in a paltry volume of roughly 1,200 shares. Expense ratio came in at 0.80%. The fund is up over 14.5% in the year-to-date period and has a Zacks ETF Rank #4 (Sell) with a Medium risk outlook (read: Why Taiwan ETFs are Surging Despite Brexit?).

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