The growing popularity of exchange-traded funds (ETFs) among investors in Taiwan has led to a rapid increase in the size of such funds at a five-year compound growth rate of 39 percent, the highest in the world, with total ETF assets reaching NT$4.04 trillion (US$126.4 billion) at the end of January, trailing only Japan and China in Asia, recent reports issued by JP Morgan Asset Management Ltd and the Securities Investment Trust and Consulting Association showed.
The ETF frenzy has prompted many of the nation’s fund managers to continue issuing new products over the past few months, with two new ETFs — the Yuanta Taiwan Value High Dividend ETF (coded 00940) and UPAMC Taiwan High Dividend Momentum ETF (coded 00939) — even sparking a rush among retail investors and causing several securities firms to suspend new subscriptions. The central bank and the Financial Supervisory Commission (FSC) have also stepped up warnings on investors’ irrational behavior and potential risk.
Eyeing potential product and market risks associated with ETFs, the FSC has implemented six regulatory measures aimed at enhancing product structure, improving data transparency and increasing liquidity for ETFs. However, these measures stop short of introducing caps on how much could be raised by a single ETF, as equity ETFs still represent a relatively small portion of total equity market capitalization in Taiwan, the commission said.
Meanwhile, Fitch Ratings Inc said that continued growth in Taiwanese domestic equity ETFs, especially those focusing on high-dividend or technology stocks, could lead to increased market volatility during a rally or sell-off in ETFs’ constituent stocks, or result in excess valuation for a concentrated portfolio of equities as investors rush to buy constituent stocks on the local bourse directly.
Investment experts are also increasingly worried that some equity ETFs might become a speculative target rather than a long-term investment tool amid retail investors’ buying spree.
The frenzy around Taiwan’s ETFs also highlights a fundamental problem: that the nation has a high level of excess savings, defined as gross savings exceeding gross investment. Too much extra savings indicate that the nation’s private consumption and investment remains tepid, a situation that demands a government response.
The Directorate-General of Budget, Accounting and Statistics last month revised upward its estimate for excess savings to NT$3.84 trillion for this year, higher than its previous estimate of NT$3.7 trillion made in November last year and expanding from NT$3.31 trillion last year. This year’s excess savings rate is projected to hit 15.46 percent, the highest in three years, the agency said.
If Taiwanese businesses and consumers remain reluctant to invest or spend in the domestic market to stimulate the economy, such money would either go overseas to finance investments in other countries or swarm into domestic ETFs or the real-estate market. Taiwanese investors’ continual attraction to ETFs might also suggest they remain interested in long-term financial management, hoping to accumulate wealth for their retirement.
The central bank suggested various solutions to address this problem, such as increasing private-sector participation in public construction projects, guiding private funds to develop innovative financial services and wealth management businesses, and encouraging firms to use excess savings on cross-border mergers and acquisitions.
However, the effects seem limited and government agencies must work harder to tackle this issue. If new investment opportunities could be opened up in the economy, more highly paid jobs could be provided, which means funds would not simply flow into ETFs and the real-estate market.
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