Taiwan’s thematic ETF market takes off as competition intensifies

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The number of new thematic exchange-traded funds in Taiwan has jumped this year as fund managers try to differentiate themselves amid increasing competition.

Recently launched ETFs in Taiwan have focused on the country’s domestic semiconductor and electric vehicle industry. At least four additional thematic ETFs are also underway with themes such as ‘vehicles of the future’, ‘global genomics’ and ‘immune biopharma’.

In 2020, only four thematic ETFs were launched in total, with three targeting the 5G theme and one focusing on cybersecurity, according to data from the Securities Investment Trust & Consulting Association.

Newly launched thematic ETFs in Taiwan have performed well this year, both during their initial public offering process and in the months following the first round of fundraising, with many outperforming their market peers in terms of size.

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

Among the 10 largest foreign equity ETFs by assets under management in June, four are thematic ETFs targeting electric vehicles and 5G themes. Cathay Securities Investment Trust’s Global Autonomous and Electric Vehicles ETF, which was only listed on July 1, has already become the largest foreign equity ETF in Taiwan, with $ 483 million in assets under management, according to Keystone Intelligence data.

Three thematic ETF strategies also entered the list of the top 10 ETFs targeting domestic Taiwan stocks. This is Cathay SITE’s Taiwan 5G Plus ETF, which ranks third, behind the two massive broad-market ETFs issued by Yuanta Securities Investment Trust years ago.

The thematic fund boom is not only a Taiwanese phenomenon, but has become a global trend since the start of the coronavirus pandemic. In the past three years to the end of March, assets under management of global thematic funds more than tripled to $ 595 billion, according to a Morningstar report released in May.

“It is striking how these products have experienced a flow of assets. One of the reasons is that most of them follow long-term structural changes and the pandemic has accelerated those changes, ”said Kenneth Lamont, London-based senior analyst for manager research at Morningstar and author. main report.

In Taiwan, the thematic fund market more than doubled to $ 5.1 billion in the year ending in the first quarter of 2021, according to the report.

“In Taiwan, the growth in fund products can generally be attributed to three reasons: more lenient regulations, changing investor needs and product innovations driven by the asset managers themselves. For thematic funds, it’s because of the last two reasons, ”said James Lo, head of the ETF product team at Taipei-based Franklin Templeton SinoAm Securities Investment Management.

The growing number of thematic ETFs also responds to the growing interest of young Taiwanese investors.

“Taiwanese investors have always been very open to new investment themes. Thematic funds are particularly popular with young investors, who are knowledgeable about technology and have their own investment opinion. Traditional beta funds can’t satisfy them anymore, ”said Morris Chen, senior vice president of Taipei-based CTBC Investments.

However, the boom in the thematic ETF industry in Taiwan could also be the result of increasing competition among local fund companies.

“There are already enough large market ETFs, so fund managers need to launch more niche products to differentiate themselves. Taiwan is a small market after all. Even in the thematic fund market, if you have two or three funds that follow the same theme, that’s more than enough, ”said an executive from Yuanta SITE.

However, the intense competition among Taiwanese fund companies may also have forced them to abandon their long-term growth goals instead of raising funds for new themed ETFs making headlines, resulting in a design shift. from ETFs as an asset allocation tool to the design of ETFs as a tool for short-term gains, or even intraday transactions.

When the ETF market took off in Taiwan, fund groups discussed launching ETFs that could be a component of investor asset allocation, an executive at a national fund house said. not be named.

But over time, asset managers began to discuss ETF launch plans with “long-term themes,” which created the recent thematic ETF boom. More recently, however, the “long-term” aspect had quietly disappeared from internal discussions among fund houses, the executive said.

Morningstar research shows that more than two-thirds of thematic funds around the world outperformed global equity markets in the fiscal year ended March 2021.

However, over a five-year period, the percentage of thematic funds that outperformed the market fell to 43%. Over a 15-year horizon, more than half of thematic funds had closed their doors globally, and only 22% of thematic funds had survived and outperformed global equities, according to the Morningstar study.

* Ignites Asia is a news service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at ignitesasia.com

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