Download The market has seen leveraged and inverse exchange

Asset
Owners
AN ETF EVOLU
The market has seen
leveraged and inverse
exchange-traded fund
volumes soar this
year. Further growth
looks likely in other
asset classes too
By Christina Wang
T
aiwan offers a prime example
of the ability of exchangegraded funds (ETFs) in their
various permutations to
gained traction in Asia.
While retail investors across much of
Asia still favour more traditional buyand-hold investments, many investors in
Taiwan are increasingly pursuing more
sophisticated strategies such as hedging,
speculation and arbitrage. That has led
many to seek to invest into leveraged
and inverse (L&I) ETFs.
Unlike regular ETFs, which are longonly and typically track the movements
of an underlying stock index, leveraged
ETFs enhance the effective exposure
of an investor to the underlying
benchmark, while inverse ETFs
perform in opposition to the underlying
benchmark.
Demand for these products has been
catered to by a supportive regulator,
which has allowed asset managers to
pursue product innovation. That in turn
has allowed fund managers to draw in
assets to the extent that Taiwan only lags
Japan in terms of money invested into
these products.
24 AsianInvestor November 2016
But the appetite of Taiwan’s investor
base is far from infinite, and the market
for L&I ETFs may have already hit its
peak, even as strong competition has
led fees to fall in this already low cost
sector. That is leading fund houses to
increasingly pitch fixed income and
smart beta strategies instead. Both
strategies offer potential appeal to
pension funds and insurance companies,
which want to offer new retirement
products at a time of low yields.
ETF growth
Taiwan’s ETF market was born in 2003
with the launch of the Yuanta/P-shares
Taiwan Top 50 ETF. It’s enjoyed rapid
growth in the years since, with assets
invested into ETFs rising from $1.16
billion at end 2003 to $9.08 billion
in September this year, according to
research house Keystone Intelligence.
In the early days investors took a
buy-and-hold stance for ETFs, and
some made regular investment plans
into this asset class. The dividends and
risk diversification offered by stock
index ETFs also appealed to pension
funds, and increasingly retail investors
as they shifted from stock picking to
asset allocations, Chou Hui-mei, deputy
director general of Taiwan Financial
Securities Commission’s securities and
futures bureau, told AsianInvestor in an
interview.
Those dynamics, along with a global
rise in passive investing, led Taiwan’s
regulator to seek to further develop
ETFs. And, increasingly, this has taken
place in the L&I space. Assets dedicated
to L&I ETFs rose to $5.2 billion by
the end of September, according to the
Taiwan Stock Exchange.
Henry Lin, president of Fubon Asset
Management, Taiwan’s second-largest
ETF provider, told AsianInvestor that
about one to two years ago institutional
investors started to build portfolios via
ETFs and use the products, including
L&I ETFs, for short-term trading
purposes. Asset owners in Taiwan
have increasingly used L&I ETFs for
speculation, arbitrage and hedging
“That demand has driven the rapid
growth of L&I ETFs in Taiwan in the
past two years,” Julian Liu, president
and chief executive of Yuanta Securities
Investment Trust Company (Yuanta
SITC), told AsianInvestor. The company
is the largest ETF provider in Taiwan,
with a 71% market share.
Ivan Han, senior analyst at research
house Cerulli, said Taiwan has done
more than other nation to grow L&I
ETFs this year. For example, the FSC
approved L&I futures ETFs to launch
in May, and it signed partnerships with
countries like Japan, Korea and Malaysia
with a view of developing this segment.
It also revised rules to allow dual
currency ETFs in August, which should
lead some of the Rmb311.8 billion of
renminbi deposits situated in the state to
be invested into the vehicles, Han told
AsianInvestor.
Investment appetite
Yuanta’s Liu noted that institutional
investors in Taiwan have increasingly
begun using various ETFs in different
manners. Typically they maintain their
core stock and regular ETF holdings
and use leveraged ETFs to increase
their positions for short-term return
enhancement, while buying inverse
ETFs to hedge their long positions.
For example, many Taiwan
institutional investors have core asset
positions in Taiwan and US stocks, so
they hold inverse ETFs of these two
markets as well. For life insurance
companies in particular inverse ETFs
are regarded as a better hedging vehicle
than futures, which are generally
frowned upon due to being a derivative
product, Liu said.
www.asianinvestor.net
TION
The desire to hedge has meant that,
as of the end of August, the biggest
ETF listed in Taiwan was an inverse
ETF – the Yuanta Daily Taiwan 50 Bear
-1X ETF, with $2.7 billion in AUM. It
accounted for 30% of total ETF AUM
in Taiwan, according to Keystone data.
Outside of L&I ETFs, Taiwan
investors tend to have a home bias in
their preferences, similar to most other
countries, Jackie Choy, Asia director
of ETF research at Morningstar, told
AsianInvestor. As of end August, ETFs
tracking Taiwan markets accounted for
57.5% of the total AUM of ETFs listed
in the state, while ones tracking China
instruments took up 38.2%, according
to Keystone Intelligence.
The surge of ETFs stands in marked
contrast to traditional mutual funds,
which declined 18.7% between the end
of 2003 and September this year to
NT$2.17 trillion ($68.7 billion).
The reasons for this are fairly simple:
ETF management and trading fees are
far cheaper than actively managed funds
and offer an easy means to build asset
diversification, Donna Chen, founder
and president of Keystone Intelligence,
Growth of ETF markets in Taiwan
10
US$b
8
6
4
2
0
03 04 05 06 07 08 09 10111213 14 15 16
Source: Keystone Intelligence and TWSE
www.asianinvestor.net
told AsianInvestor. Meanwhile many
actively managed funds have failed to
perform.
Product outlook
The growth of equity ETFs has been so
pronounced in Taiwan that the market is
looking close to saturation. Yuanta’s Liu
predicts the growth of this type of ETFs
to be flat in the coming months.
Instead, growth is expected to come
from new ETF types, such as bond,
commodity, and foreign currency ETFs
– all of which have gained approvals in
Taiwan. Strategies can vary accordingly,
including traditional, leverage, inverse
and smart-beta, catering to different
investors’ demand, Liu said.
In particular, the industry is focusing
on offering smart beta ETFs, with the
encouragement of the FSC, Chou told
AsianInvestor.
Some of Taiwan’s pension funds have
put big allocations into smart beta
strategies, while insurance companies
are also seeking tailor-made smart-beta
investments, said Fubon’s Lin.
Bureau of Labor Funds, the island’s
largest pension fund operator, stands as
a key example. As of the end of August
its overseas smart-beta investments
accounted for 32% of the NT$1 trillion
it had in foreign mandates. The state
pension company plans to continue
increasing its allocation to smart-beta
strategies because they offer sound and
stable returns in the long term and
diversify portfolio risks, director general
Huang Chao-hsi told AsianInvestor.
Insurance companies are mainly
looking to invest into smartbeta strategies to gain investment
diversification and seeking dividends.
Lin said Fubon has helped some insurers
construct smart-beta portfolios that
combine equities and bonds.
Smart-beta products could gain an
extra fillip when Taiwan introduces the
‘Speculation and
hedging demand has
driven L&I ETF
growth in the past
two years’
Julian Liu,
Yuanta Securities &
Investment Trust
long-anticipated member choice pension
schemes, which allow employees to
choose their own investment vehicles for
their pension contributions, added Lin.
A spokesperson of Taiwan Stock
Exchange told AsianInvestor that it is
working with its subsidiary, Taiwan
Index Plus, to develop new innovative
indices to meet the demands of the
market. This could potentially include
indexes that track low volatility and high
dividend stocks.
Another product type suitable for the
retirement theme is bond ETFs, FSC’s
Chou told AsianInvestor. The FSC is
encouraging the products because it
feels they are appropriate to the needs
of the country’s aging population and
pension funds.
To encourage such products the
regulator has proposed an exemption of
transaction fees for bond ETFs listed
in Taiwan. The proposal is awaiting
approval from Taiwan’s Legislative Yuan,
Chou said. n
November 2016 AsianInvestor 25