Entrance of new products could shake-up Taiwan’s ETF market

22 July 2014   Category: News, Asia, China, Global, Hong Kong, Taiwan   By Hui Ching-hoo

Taiwan’s ETF landscape has long been controlled by a small group of players. However, a decision by the island’s regulatory watchdog to relax constraints on alternative index products has opened the door for new entrants to the market, promising to finally shake-up this oligopoly.

According to a report from Citibank, four ETF sponsors currently dominate: Yuanta Securities Investment Trust Company (Yuanta SITC), Fubon Asset Management Co, Fuh Hwa STIC, and SinoPac SITC. Yuanta SITC, the product of a merger between Yuanta and Polaris in 2012, has a massive 90% market share. 

An initiative by the Taiwan Stock Exchange (TSE) has however paved the way for alternative ETF products, including leveraged and inverse ETFs, as well as commodity ETFs. The first leveraged and inverse product is expected to come on stream as early as the third quarter of this year. 

Michael Lin, president of TSE, tells ETFI Asia that the ETF market presently lacks depth and breadth, with little diversity in the underlying products. The availability of alternative ETFs could invigorate the market in this respect. 

The emergence of these products is anticipated to boost liquidity in Taiwan’s ETF market from the current 1% daily turnover to about 5% in two-to-three years’ time, he claims. 

What is more, commodity ETFs will play a key role in the industry ecosystem by giving investors more options to rebalance their portfolios in plain vanilla asset classes depending on economic cycles. 

Mr. Lin shrugs off any suggestion that local investors are too risk averse for more exotic ETF flavours: “There have been a wide array of volatile investment tools, such as warrants, day trading and margin trading, coming out over the previous years. So, local investors will not find the ETFs with a high leverage ratio unfamiliar.” 

From an ETF sponsors’ perspective, new players might take the introduction of alternative ETFs as an entry point to access the market, while existing sponsors could use them as an opportunity to extend their market turf. 

Henry Lin, president of Fubon Asset Management, said that his firm will mainly issue QFII A-share linked ETFs, rather than new, domestically focussed ETFs in Taiwan, due to Yuanta’s market dominance. “However, we are still eager to participate in leveraged and inverse ETFs in the future because the products can give a new dimension to our business,” he added. 

However, Julian Liu, president and chief executive officer of Yuanta SITC, denies that the firm has an absolute advantage in the alternative ETF space, anticipating competition from new players. “To enhance investor protection, leveraged and inverse ETFs should be initially limited to sophisticated institutional investors with trading experience in warrants or other leveraged products.” 

To facilitate the launch of these ETFs, Yuanta SITC says that it has assisted the TSE and regulator in bolstering infrastructure and investor education. 

The TSE’s Mr. Lin also says that index investing has been growing in popularity in Taiwan. These products are able to provide local investors with more comprehensive and cheaper access to overseas markets. 

Furthermore, the bourse has put more effort into diversifying its indices family in order to complement the development of the local ETF market. For example, it is looking to expand its Social Responsible Investment (SRI) index series by launching its third SRI Index, the Top 100 Salary Index, later this year. 

The bourse is also in talks with the Shanghai Stock Exchange (SSE) with regards to the launch of the Greater China Index, which will combine stocks listed in China, Taiwan, and Hong Kong. 

Stewart Aldcroft, managing director of Citi Securities & Fund Services, said in a recent Citi report that retail fund sales of ETFs in Taiwan are sub-distributor-led, thus they get very little retail shelf space. “However, in late 2012, one leading sub-distributor of mutual funds began an initiative to become more pro-active of ETF distribution. This led to a significant increase in flows, but only to those ETFs listed on international exchanges, such as in New York, London, and Sydney. The US custodian bank foresees there is still much more development to occur.”

Whether the arrival of alternative ETFs in Taiwan is enough to end the four major players’ market dominance, however, is one thing that remains to be seen.