Taiwan’s central bank warns about systemic risks of rapid ETF growth

Taiwan’s central bank is predicting that the impact of locally listed equities exchange traded funds will “definitely continue to increase” as it issues a new warning to retail investors about the systemic risks associated with the rapid growth of the local ETF market.

Following a meeting of its joint supervisory committee on June 13, the Central Bank of Taiwan has published a report analysing the impact of the ETF boom on the Taiwan stock market during March and April.

The report concluded that the active participation of Taiwanese investors in the stock market, especially by buying high-dividend ETFs, has pushed Taiwanese stocks to record highs.

The continued buying of Taiwan stocks by local asset managers has also been a leading force in pushing up the stock market, with NT$349.9bn ($10.8bn) invested as of June 7, while foreign investors have only invested NT$45bn in Taiwan stocks.

This article was previously published by Ignites Asia, a title owned by the FT Group.

Taiwan-listed ETFs’ total assets grew from only NT$755.6bn at the end of 2018 to NT$4.78tn by the end of April, according to the central bank.

However, the domestic equities ETF asset growth was exponential in the same period, increasing from NT$107.1bn to NT$1.92tn, “far exceeding” the 120 per cent growth rate of Taiwan’s stock market value.

Taiwan equities ETFs accounted for 2.71 per cent of the local stock market by the end of April, according to the central bank. The average daily turnover of Taiwan equities ETF accounted for about 2.14 per cent of the total stock market last year and the figure increased to 3.09 per cent in the four months to the end of April this year.

“Although the percentage is not high, with the rapid growth in asset size and investor participation, [local equities ETFs’] influence on the stock market will definitely increase in the future,” the central bank said in the report.

The central bank also advised that government authorities should closely monitor the ETF market and educate retail investors to invest rationally.

“Many Taiwanese investors who invest in high-dividend ETFs focus only on the high dividend payout but ignore the price risk,” the bank said in the report.

“Regulators should step up investor education to remind retail investors not to blindly enter and exit the market, so they are able to avoid losses,” it added.

Taiwan’s stock market was up 21.9 per cent this year as of June 7, with electronics stocks, which account for 60 per cent of the weighting, recording a jump of 28.6 per cent.

The craze for high-dividend ETFs reached a fever pitch in March, following reports of retail investors pulling money out of fixed deposits at banks and even applying for loans to subscribe to the new ETFs.

Taiwan’s largest local ETF issuer, Yuanta Funds’ new high-dividend ETF raised NT$175.2bn in just five days, smashing the previous initial ETF fundraising record in the market more than fivefold.

The central bank’s report published last week suggested that the rapid growth of the local ETF market might bring big risks to the stock market, including concentration risks and tracking errors.

The central bank said the primary market trading mechanism used by ETFs, which involves the simultaneous trading of the constituent stocks, could reduce the risk diversification effect and increase systematic risk in the financial market.

Also, if investors rushed to buy or sell Taiwan equities ETFs, constituent stocks held by multiple ETFs might experience increased short-term price volatility.

*Ignites Asia is a news service published by FT Specialist for professionals working in the asset management industry. Trials and subscriptions are available at ignitesasia.com.