Among emerging markets, Taiwan is considered lower beta, but that does not mean investors have to sacrifice returns. For example, the iShares MSCI Taiwan ETF (NYSEArca: EWT) is higher by almost 20% year-to-date and some technical analysts believe Taiwanese stocks have the potential to keep rallying.
EWT’s hefty technology sector allocation, which is more than 57.8% 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. Alone, Taiwan Semiconductor accounts for almost 23% of EWT’s weight.
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.
“In February 1990, the Taiwan Cap Weighted Stock Index (TAIEX) capped off the monster run over the prior decade, closing at a high of 12,424. For the next six months, the index would go on to shed 80% of its value. From that point, the TAIEX would enter a trading range perhaps unprecedented in modern equity markets. For more than 2 ½ decades, the index would trade between roughly 3000 on the low end and 10,200 on the high end. At least a half a dozen times over that period, the TAIEX tested the 10,000-10,200 area, only to be rebuffed. Until this week,” according to ETF Daily News.
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.
That ETF is up 15.4% year-to-date.
“Of course, even if this breakout holds, the TAIEX will have to contend with its 1990 highs about 2000 points away. Even so, that would mark a 20% increase from current levels – not chump change. Most importantly, in our view, is the fact that the index is making a legitimate run at surpassing those peaks of the past 25 years,” according to ETF Daily News.
The $3.5 billion EWT tracks the MSCI Taiwan 25/50 Index and holds 92 stocks.