Taiwan’s financial regulator is dropping a near two-decade old restriction that bars the underlying indices of exchange-traded funds from holding more than 30% in a single stock.
Instead, holdings in a single stock will be capped in proportion to its total market value, Gao Jingping, deputy director of the securities and future bureau of the Financial Supervisory Commission (FSC), said at a press conference on May 8, held to announce the rule change. The new rule could come into effect as early as this week.
The 30% cap was introduced in 2006 to ensure that index constituents are more diversified.
But Gao said it means ETFs cannot fully mimic performance of Taiwan Semiconductor Manufacturing Company (TSMC), which now accounts for more 36% of the local stock market value.
“The relaxation of the 30% limit for a single stock component has two main benefits: first, it reduces tracking errors for ETFs; second, it provides greater flexibility in ETF management,” Gao said, adding that it will allow Taiwan equity ETFs to raise their holdings in TSMC, potentially triggering a new wave of buying.
For now, the relaxation will only apply to traditional broad-based ETFs.