What is good for an exchange traded fund on the way up can be bad on the way down and that is a lesson the iShares MSCI Taiwan ETF (NYSEArca: EWT) is currently learning.
Less than four months removed from hitting its highest levels since the global financial, EWT, the largest Taiwan ETF trading in the U.S., is down 13.3% over the past 90 days and closed at its lowest levels since the late first quarter of 2014 on Thursday.
What’s plaguing EWT might come as a surprise to investors that are not intimately familiar with the ETF. EWT’s hefty technology sector allocation, which is 54.6% of the fund, has become problematic. Moreover, it is the ETF’s arguably excessive weight to one stock, Taiwan Semiconductor (NYSE: TSM), that is creating EWT’s problems.
Taiwan Semiconductor, EWT’s largest holding at nearly 23% of the fund’s weight, is down less than 2% year-to-date, but the stock’s losses are accelerating as highlighted by a one-week decline of more than 6%. Making matters worse for Taiwan Semiconductor and EWT is ominous technical outlook for a major semiconductor index. [ETF Plays to Capture Growth in Emerging Asia]
“However, this month, moving averages not only broke several weeks ago but the averages themselves are now crossing each other to the downside. In the chart, the 10-week average plunged through the 20- and 30-week exponential averages and the 20- is on track to cross the 30- as early as next week,” wrote Michael Kahn for Barron’s in reference to the PHLX Semiconductor Index.
A prolonged downturn in semiconductor stocks would obviously be unkind to EWT and that scenario is being across some other ETFs as well. In addition to EWT, ETFs with large weights to Apple (NasdaqGS: AAPL) and Samsung are reminding investors that ETFs with 20% weights to a single stock do a poor job of mitigating single-stock risk.
Earlier this year, EWT climbed on hopes of a potential stock-trading link between Taiwan and Shanghai pushed shares higher – a similar program between Shanghai and Hong Kong has helped support a rally in both markets. Taiwanese authorities also recently introduced limits on foreign investments in the corporate debt market in an attempt to diminish inflows that strengthened the local currency.
Still, EWT’s recent price action belies its usually conservative reputation. With a three-year standard deviation of about 11%, EWT is one of the least volatile single-country emerging markets ETFs on the market.
iShares MSCI Taiwan ETF
