Taiwan’s thematic ETF market takes off as competition increases
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The number of new thematic exchange traded funds in Taiwan has jumped this year, as fund managers try to stand out amid mounting competition.
ETFs recently launched in Taiwan have focused on the country’s domestic semiconductor sector and electric vehicles. At least four additional thematic ETFs are also on the way with themes including “future vehicles”, “global genomics” and “immune biopharma”.
In 2020, only four thematic ETFs were launched in total, with three of them targeting the 5G theme and one focusing on cyber security, data from the Securities Investment Trust & Consulting Association show.
Newly launched thematic ETFs in Taiwan have fared well this year, both during their initial public offering process and in the months following the initial fundraising, with many outstripping their broad-market peers in terms of size.
Among the 10 largest foreign equities ETFs by assets under management in June, four are thematic ones targeting electric vehicles and 5G themes. Cathay Securities Investment Trust’s Global Autonomous and Electric Vehicles ETF, which was only listed on July 1, has already become the largest foreign equities ETF in Taiwan, with $483m in AUM, according to data from Keystone Intelligence.
Three thematic ETF strategies have also entered the list of the 10 largest ETFs targeting Taiwan domestic stocks. These are Cathay SITE’s Taiwan 5G Plus ETF, which ranks third, trailing only the two massive broad-market ETFs issued by Yuanta Securities Investment Trust years ago.
The boom of thematic funds is not just a Taiwanese phenomenon, but has become a global trend since the start of the coronavirus pandemic. Over the past three years to the end of March, global thematic funds’ assets under management more than tripled to $595bn, according to a Morningstar report published in May.
“It’s striking how much asset flow these products have seen. One reason is that most of them track long-term structural changes and the pandemic has accelerated these changes,” said Kenneth Lamont, London-based senior analyst for manager research at Morningstar and lead author of the report.
In Taiwan, the thematic fund market more than doubled in size to $5.1bn in the year ended first quarter of 2021, according to the report.
“In Taiwan, the growth of fund products can generally be attributed to three reasons — more relaxed regulations, change in investors’ needs and product innovations driven by asset managers themselves. For thematic funds, it is because of the last two reasons,” said James Lo, Taipei-based head of ETF product team at Franklin Templeton SinoAm Securities Investment Management.
The growing number of thematic ETFs is also catering to rising interest from young Taiwanese investors.
“Taiwan investors have always been very open to new investment themes. Thematic funds are especially popular among young investors, who are technology savvy and have their own opinions when it comes to investing. Traditional beta funds can no longer satisfy them,” said Morris Chen, Taipei-based senior vice-president at CTBC Investments.
However, the boom in Taiwan’s thematic ETF sector might also be a result of increasing competition between local fund houses.
“There are enough broad-market ETFs already, so fund managers need to launch more niche products to differentiate themselves. Taiwan is a small market after all. Even in the thematic fund market, if you have two or three funds tracking the same theme, that’s more than enough,” an executive at Yuanta SITE said.
However, intense competition among Taiwanese fund houses may have also forced them to abandon long-term growth targets in place of fundraising for new headline-grabbling thematic ETFs, resulting in a shift from designing ETFs as a tool for asset allocation to designing ETFs as a tool for short-term gains, or even intraday trades.
When the ETF market first took off in Taiwan, fund groups talked about launching ETFs that could be a component in investors’ asset allocation, said an executive at a domestic fund house who did not want to be named.
But as time went on, asset managers started discussing plans to launch ETFs with “long-term themes”, which created the recent thematic ETF boom. More recently though, the “long-term” aspect had quietly disappeared from fund houses’ internal discussions, the executive said.
Morningstar research shows more than two-thirds of thematic funds worldwide outperformed global equities markets in the year ended March 2021.
However, over a five-year period, the percentage of thematic funds that outperformed the market dropped to 43 per cent. When stretched out over a 15-year horizon, more than half of the thematic funds had shuttered globally, and just 22 per cent of thematic funds had survived and outperformed global equities, the Morningstar study found.
*Ignites Asia is a news service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at ignitesasia.com