Though they are generally considered more conservative than other single-country emerging markets exchange traded funds, Taiwan ETFs have not been immune to slumping global equity markets to start 2016. That much is highlighted by a nearly 8% year-to-date loss for the iShares MSCI Taiwan ETF (NYSEArca: EWT).
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 more than 50% 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.
EWT “invests 55.5% of its portfolio in companies within the information technology sector and 18.51% in the financials sector. This indicates EWT has a high degree of sector risk among other risks inherent to the fund. EWT is best-suited for long-term growth investors with a moderate degree of risk tolerance who are bullish on Taiwan’s equity market and the information technology sector,” according to Investopedia.
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.
EWT has a smart beta rival in the form of the First Trust Taiwan AlphaDEX (NYSEArca: FTW).
“FTW’s benchmark index selects securities from the NASDAQ Taiwan Index and seeks to generate positive alpha by using the AlphaDEX methodology. Under normal market conditions, FTW invests at least 90% of its total net assets in American depositary receipts (ADRs), common stocks and global depositary receipts (GDRs) comprising its underlying index,” adds Investopedia.
Last year, Taiwanese stocks enjoyed a brief rally 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.
iShares MSCI Taiwan ETF
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.