Taiwan’s ETF market sees third growth wave

Fixed income and AI thematic ETFs excite institutional and retail investors alike

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Having taken nearly 20 years to reach US$1 trillion, assets under management of exchange traded products (ETPs) globally doubled from US$2 trillion to US$4 trillion in just 3.5 years, according to latest figures. Taiwan has emulated this trend with more than 100 exchange listed products attracting more than NT$500 billion in assets.

For Eddie Cheng, head of ETF at Cathay Securities Investment Trust, 2018 marked the third wave of growth for ETPs in the country. Following the successful launch of numerous leveraged and inverse ETFs, investors have discovered bond ETFs to be a new niche in the market with attractive returns. Less than two years after the first such ETF was listed, total AUM for the segment now exceeds NT$180bn already in late 2018. Taiwan thus surpasses all other Asian markets, including South Korea, to be Asia's largest fixed income ETF market.

Products launched so far exhibit wide diversity, tracking performance of fixed income products that range from US treasury bills to investment grade bonds to high yield bonds, across markets including the United States and China.

With the active participation of institutional investors, Taiwan's bond ETFs market size has begun to gradually achieve economies of scale. "ETFs are for both retail and institutional investors," notes Cheng. "In the US, there are many examples which show that the bid-ask spread of a bond ETF is actually tighter than underlying bonds which investors used to see. This means ETFs really bring new players, new strategies and more opportunities for the market," he concludes.

Eva Lin, senior fund manager of Cathay EM USD Investment Grade ETF adds: "The growth of bond ETFs not only comes from interest in bond investment, but also from the huge demand for diverse asset allocation. When the equity market went into a crisis globally, funds pulled back from emerging market, the US dollar appreciated against the New Taiwan dollar and the price of US Treasuries rose. The process is so-called Flight to Quality."

Moreover, as the secondary market trading mechanism matures, it provides investors with sufficient market liquidity, which further expands the degree of participation from institutional investors.

Cathay SITE, which recorded double digit return on equity in the nine months to September 2018, has listed six bond ETFs to date, including the Cathay US Treasury 20+ Year, the Cathay BBB Corporate Bond ex China, and the Cathay High Yield ex China capped ETFs.

Thematic ETFs are further boosting the local market. Cathay SITE's Nasdaq CTA Artificial Intelligence and Robotics ETF was the first of its kind and is already ranked in the top 20 liquid ETFs in the market. Artificial intelligence is expected to stir the next wave of digital innovation, with the technology impacting a number of next generation industries, including computer vision, language, virtual agents, robotics and autonomous vehicles, and machine learning. Indeed, based on research by McKinsey, tech giants such Google and Microsoft have spent $20 billion to $30 billion on A.I. in 2016 alone.

"We are at an inflection point to embrace a new era of artificial intelligence," says Andy Chang, president and CEO of Cathay SITE. "Those Taiwanese companies with such technology should have more support and flexibility to access funding, regardless of whether it is private or public capital."

Jimmy Yu, senior fund manager of Cathay Nasdaq CTA Artificial Intelligence and Robotics ETF adds: "Thematic ETFs, in fact, are quite common, but investing in the A.I. industry people must pay attention to the selection of constituent stocks and the method of weighting allocation. Therefore, the professionalism and authority of the index provider is very important." At present, the AUM of Cathay's A.I. & Robotic ETF has reached NT$1.5 billion. It is currently the largest thematic ETF in Taiwan – a reflection of its superior performance among peer funds.

Cathay SITE fixed income ETFs

  • Cathay US Treasury 20+ YR ETF
  • Cathay BBB Corporate bond ex China Coupon 4.5% 10Yr+ 20% Sector Capped ETF
  • Cathay High Yield ex China Cash pay 1-5 Year 2% Issuer Capped ETF
  • Cathay EM USD Investment Grade ex China Coupon 5.5% 5Yr+ 10% Country Capped ETF
  • Cathay FTSE Chinese Government and Policy Bank Bond 0-1 Year Select ETF
  • Cathay FTSE Chinese Policy Bank Bond 5+ Years ETF