One of the primary advantages of many equity-based exchange traded funds is that these products help investors skirt single stock risk.
However, that is not the case for all stock ETFs as some ETFs, including some well-known international funds, have significant exposure to just one stock.
That is true of the iShares MSCI Taiwan ETF (NYSEArca: EWT), which allocates a significant portion of its weight to chip giant Taiwan Semiconductor (NYSE: TSM).
EWT has, at various points during its almost 16-year history, been a favorite among investors seeking single-country exposure to developing economies because Taiwan is one of the least volatile emerging markets.[related_stories]
But EWT’s docile reputation relative to other single-country emerging markets exchange traded funds does not mean the fund cannot generate big returns.
SEE MORE: Are China ETFs Ready to Rally?
EWT’s hefty technology sector allocation, which is more than 57% 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.
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 “uses the company’s Taipei-traded shares rather than the American depositary receipts, but both stocks mirror each other quite well. The U.S. and Taiwan shares are pulling back to the 50-day moving average for the third time since breaking out to new highs in June. Both charts bear a resemblance to iShares MSCI Taiwan ETF this year, which is up 20% in 2016,” reports Investor’s Business Daily.
Related: 15 Cheap Emerging Market ETFs
EWT has a smart beta rival in the form of the First Trust Taiwan AlphaDEX (NYSEArca: FTW). FTW’s holdings are selected based “on growth factors including 3-, 6- and 12- month price appreciation, sales to price and one year sales growth, and separately on value factors including book value to price, cash flow to price and return on assets,” according to First Trust.
Although FTW allocates almost 56% of its lineup to tech stocks, Taiwan Semiconductor is not one of its top 10 holdings.
Later this month, EWT “will start tracking the MSCI Taiwan 25/50 Index. It is quite similar to the current MSCI Taiwan Index, but the new one caps the largest holding, i.e., Taiwan Semi, at 25% of the portfolio,” according to IBD.
iShares MSCI Taiwan ETF