Two innocuous-sounding exchange traded funds (ETFs), the Yuanta Taiwan Value High Dividend ETF 00940 and the UPAMC Taiwan High Dividend Momentum ETF, have created a frenzy in Taiwan’s capital markets, sucking in a combined NT$220 billion in March 2024 alone.

It may be hard to fathom, but Taiwan equity ETFs have suddenly become so attractive that investors are cashing out time deposits and even taking loans to get in on the action. Subscription demand was so massive at one point that the brokerage system crashed and trading in these ETFs was suspended.

This ETF frenzy has emerged as a wonder of the world.

At an international conference in London attended by a CommonWealth reporter, a JP Morgan Asset Management representative specifically brought up Taiwan when analyzing the global ETF market.

Taiwan’s ETFs have absorbed funds at a faster pace than anywhere in the world, growing 22.7-fold over the past five years, and the NT$3.9 trillion invested in them is the third highest in Asia, behind only Japan and China. Over this same period, investments in ETFs in the United States and Europe grew only 19 percent per year.

But what has really caught the world’s eye is that while Japan and China ETFs are supported by government and pension funds, the main investors in Taiwan ETFs are retail and corporate accounts. Perhaps even more unique is that over 60 percent of them are buying high dividend ETFs, including the red hot Yuanta 00940 ETF.

What does this all mean?

Taiwan’s appetite for passive investments, the holding of securities for longer periods of times, has been unrivaled, but that has led to a distortion in asset allocations over the medium and long term. Though retail funds have traditionally flowed to a wide range of investment vehicles, retail investors seem now to be losing interest in small and medium cap stocks, causing indexes focused on such stocks to stagnate and potentially making it harder for smaller companies to raise capital.

Concentrated Risk: Taiwan’s Fund Chaos
Allocations skewed by “thirst for yield”

Why have Taiwanese investors flocked to high-dividend ETFs, at the expense of other investment targets? 

Simple. The interest Taiwanese banks have paid on savings has remained below 2 percent throughout the 21st century, leaving the local population with a huge thirst for higher interest returns. 

The mountain of funds built up by Taiwan’s high savings rate over time has acted as a major reservoir waiting to burst. That many of those funds are now flowing into high dividend ETFs after infatuations with high-yield bond funds, insurance policies linked to target-maturity bond funds, and savings insurance plans is merely a coincidence.  

Over the past 10 years, Taiwan’s Financial Supervisory Commission (FSC) has been extremely busy patching up one speculative investment wall only to have this huge tidal wave of money knock another one down.

At one point, the craze among Taiwanese investors was high-yield bonds, which stunned international fund managers because those securities were what were commonly referred to as junk bonds. Eventually, the FSC required that these bonds be described as “non-investment grade bond funds” because it was concerned that investors would be misled by the “high yield” designation. 

Fast forward to 2024, and history seems to be repeating itself. The FSC is cracking down on “income equalization” plans (which prevent sharp increases in the number of ETF shares from diluting per-share income), influencer placement schemes, and high-dividend ETFs. Legislators have voiced concerns that the designation “high-dividend” could again mislead the public.  

Several wealth management veterans see the root of the problem as Taiwan’s long-term low interest rate environment coupled with the small scale of Taiwan’s bond market, resulting in a lack of long-term Taiwan-dollar denominated investment vehicles offering relatively decent rates of return.

That has led to portfolio allocations by Taiwanese investors that are abnormal by international standards.

In the United States, the biggest ETF market in the world, the most common ETFs are market-weighted ETFs that track major market indices, supplemented by Smart Beta ETFs focused on specific industries or trends. In Taiwan, however, the scale of high-dividend ETFs is double that of market-weighted ETFs (which weigh their constituents based on market capitalization). 

Hidden Concern: Market Out-of-Whack
Financial talent to become ‘contractors’?

The skewing of investor funds to specific types of ETFs is not ideal for the long-term health of the financial sector or capital markets, and if foreign investment were reduced or pulled out it would be detrimental to the ongoing cultivation of talent in the field.
 
Sharon S. Yang, a professor in National Cheng Chi University’s Department of Money and Banking, has noticed that graduates are having a much harder time than in the past finding jobs involving securities research. She said students used to be able to hook up with a foreign investment bank or domestic investment trust company as fund managers or industry analysts after graduating, but those opportunities have dried up.
 
Though firms offering popular passive investment options also require talent, most of the opportunities are overseas. When schools in Taiwan invite people from international index companies to speak, for example, they are generally sent in from Hong Kong, Singapore, Britain, or Shanghai.

Many ETF fund managers in Taiwan only have to follow indices compiled by foreign countries, quite different from active fund managers who have to sift through sands to find gold.

“Active fund managers are like R&D people in the tech sector, while passive managers are more like contract manufacturers,” Yang said.

Some people in the industry are worried that if the trend continues, active funds could gradually disappear from the market, turning Taiwan’s hopes of emerging as an asset management center into a pipe dream. Some companies have already shifted their focus from active funds to ETFs, reducing their active fund sales. That could stunt the growth of funds run by veteran fund managers with exceptional research and trading skills.

(Source: CommonWealth Magazine)

“If the assets in funds don’t grow or even shrink no matter how well they’re managed, fund managers won’t have any sense of achievement and their bonuses will be affected,” said Jeff Chang (張錫), the chairman of Cathay Securities Investment Trust.

Chang himself was once a star fund manager, and the booming ETF market got him thinking about the career prospects for fund managers. Cathay Securities Investment Trust set up discretionary trading operations (where trading decisions are made by a portfolio manager on behalf of a client) early on and now manages such products as private school funds and pension funds, giving talented people with research skills a new stage.

Trend: A Rise in Active ETFs
Need for shift from trading to allocation

Within Asia, Australia, Japan, and Singapore already have active ETF products, but Taiwan has yet to allow them. 

Julian Liu (劉宗聖), known as the “ETF godfather,” has advocated shifting ETF market education from “trading” to “allocation.” 

“Retirees can’t not have high-dividend ETFs, but they can’t only have high-dividend ETFs,” he said. 

Liu, who has spent 20 years educating the market on ETFs, believed that brokerage firms would be the key to the future allocation of ETF portfolios.

Citing the examples of Charles Schwab and Rakuten Securities, Liu said that as brokerage firms evolve into the future, they will no longer focus on collecting trading fees but instead try to generate consulting fees by helping investors build ETF portfolios.

Whatever the trend, the surge in funds flowing into high-dividend ETFs is bringing big changes to Taiwan’s capital markets, wealth management ecosystem, investor education, and brokerage firm business models that are sure to affect retail investors in the future.    

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Translated by Luke Sabatier
Uploaded by Ian Huang