Taiwan was one of the most promising nations this year in the Asia-Pacific space given the rising wave of foreign investment, which made Taiwan AlphaDEX Fund (FTW) the star performer in the space. Another pure play on Taiwan – iShares MSCI Taiwan ETF (EWT) – made a place for itself in the top 10 Asia-Pacific ETF list this year too.
Per the sources, net foreign investment in Taiwan was $8.6 billion, while buying was as little as $2.7 billion for 2013. This stupendous level of buying labeled Taiwan as the most loved investment haven in Asia. A flurry of foreign money propelled Taiwanese stock index to the highest level in about seven years.
Within the Asian markets, only India was able to attract more cash from foreign investors than Taiwan. Notably, foreigners purchased about 1.8% of the Taiwan equity market cap while their share in Indian market stands at around 1.1% (read: State Street Launches Six International Quality ETFs).
As per Wall Street Journal, the appeal of Taiwanese technology companies was the reason behind the surge. Taiwanese semiconductor companies caught attention globally by manufacturing equipment for the likes of Apple (AAPL - Analyst Report), Sony and Nokia (NOK) (read: Time to Bargain Hunt with This Technology ETF?).
Now with an improving global economy and more demand for gadgets and smartphones from various brands in emerging markets, tech-component companies should soar higher. Market experts believe that iPhone 6 is slated to hit the market later this year which will help Taiwanese semiconductor companies.
Which Company Will Benefit the Most?
The answer is Taiwan Semiconductor (TSM - Snapshot Report), one of the largest semiconductor companies in the world. The company started making some A-series chips for Apple's iOS devices starting 2014 and is all set to gain from Apple's iPhone 6. Some other companies likely to benefit from the Apple launch is Hon Hai Precision Industry Co. and Pegatron Corp., per the Journal.
Also, the slowdown in another manufacturing hub – China is giving a big-time boost to the Taiwanese tech stocks. Taiwan as a nation is quite steady having survived last year’s taper-induced Asian equities sell-offs nicely. Decent GDP growth, low inflation levels, good current account balance and robust foreign exchange reserves should help Taiwan equity market in the coming days as well.
Given this surge in the Taiwan market, investors might think that equity or ETF plays in this market would be a better idea. While Taiwan has substantial share in various emerging market and Asia-Pacific equity ETFs, FTW and EWT can come across as better bets thanks to their sole focus on Taiwan (read: Can These Emerging Market ETFs Continue to Outperform?).
While FTW surged (up 14%) double EWT (up 7%) from a year-to-date look, we suggest investors to go for EWT given the huge exposure of the latter in Taiwan Semiconductor, the company believed to score higher on Apple’s new launch. Shares of TSM surged more than 21% this year, and could be in focus as the new iPhone’s launch nears.
On the other hand, FTW has a spread out approach with Inotera Memories Inc – its top holding – accounting for 6.9% of the basket. The fund does not include TSM in its top 10 holdings though it has some much-discussed companies like Pegatron Corp and United Microelectronics in its top-10 list.
Thus, for investors interested to play especially the surge in TSM but seeking to minimize the risk of single-stock investing can put their money in EWT.
EWT in Focus
This ETF looks to track the MSCI Taiwan Index. The fund invests about $3.1 billion of assets in 104 securities. However, with around one-fifth of the total exposure being in a single company, Taiwan Semiconductor, EWT has significant concentration risk.
Hon Hai takes up the second position in the portfolio with about 7.0% share. The fund puts about 50% of assets in its top 10 holdings. Sector wise, EWT relies heavily on information technology (57.7%), financials (16.8%) and materials (10.3%).
The fund charges an expense ratio of 61 basis points. EWT is a highly liquid ETF trading at an average volume of six million shares a day. This results in low trading costs.
EWT surged about 25% in the last one year (as of June 24, 2014) and added more than 7% so far this year while iShares MSCI Emerging Markets ETF (EEM - ETF report) gained about 4% this year (read: Emerging Market ETFs in Focus on MSCI Index Review).
EWT currently has Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
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