Author: Faith Hung
TAIPEI: Money is flowing into Taiwan’s exchange-traded funds as investors seek exposure to the artificial intelligence supply chain, making analysts and regulators more cautious as the sector’s growth has become erratic and volatile.
The rush towards ETFs has changed the ownership structure of a $2 trillion market that is at a geopolitical flashpoint.
Regulators and ETF managers fear that less sophisticated investors taking advantage of the AI rush could end up hurting if markets deteriorate or tensions rise with China, which views democratically ruled Taiwan as its own territory.
Taiwan’s ETF sector was valued at T$4.74 trillion ($145.8 billion) in March, according to data from the Financial Supervisory Commission (FSC).
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This is 77% more than a year earlier, compared to a 20% enhance in the value of the benchmark equity index in the same period, indicating vast inflows of funds.
The speed of investment and the borrowed money on which most investments are based have helped push the market to novel heights. Money managers say it also increases the risk of excessive trend reversals.
“Our customers have concerns. Stocks in Taiwan rose above 20,000 points. How far can they grow?” said Peter Yang, manager of an ETF fund established by Fuh-Hwa Securities Investment Trust.
ETFs include a broad range of index trackers, dividend funds, and thematic and sector funds and are popular with both foreign and local investors. Risks to stability emerged as tensions in the Middle East and a warning of subdued global demand from market leader TSMC triggered a wave of selling in chip stocks.
On April 19, the benchmark index fell 3.8%, losing 774 points, the most in a single day. Stock exchange data showed the second-largest net selling by foreign investors on record, with ETFs making up four of the ten most-traded stocks: Yuanta Taiwan High Value Dividend ETF, UPAMC Taiwan High Dividend Momentum ETF, Fuh Hwa Taiwan Technology Dividend Highlight ETF and Capital TIP Customized Taiwan Select High Dividend ETF.
Regulators are watching
“Our approach is cautious,” Hwang Howming, deputy director general of the FSC, Taiwan’s top financial regulator, told Reuters. “We want to make sure that the interests of investors, including ETFs, are protected.”
SHAWL
Taiwanese media published reports of students and even Buddhist nuns using ETFs to gamble on the stock market, as well as investors mortgaging their homes to attend the rally.
Frank Hung, a hotel manager in Taipei who has so far found a lucrative business in ETFs, sees them as a convenient investment with little risk.
“This is an investment that fits into the artificial intelligence boom, offers high returns and is suitable for busy people like me,” he said.
Certainly, the ETF craze reflects one of the easiest ways to access a market that is seen as offering profitable exposure to computer commodities that substantial tech companies have vowed to buy as they look to grow their artificial intelligence businesses.
“In general, investors view ETFs as investments that will always be profitable. This is not necessarily true,” said Peter Hong, manager of the Capital TIP Customized Taiwan High-Tech Dividend & Growth ETF.
“However, in the longer term, Taiwan and US ETFs in this sector can be expected to show a reliable growth trend due to the huge potential of novel applications such as artificial intelligence,” Hong said.
However, if growth that has stalled begins to reverse, then those who bought ETFs in good times may be the first to get out, and overleveraged entities may find themselves trapped in investments they can no longer afford.
“ETFs mostly track the broader market, which makes them vulnerable and unprotected against market volatility,” said Adrian Wang, senior vice president of Cathay Securities Investment Trust.
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