Taiwan's ETF market has grown to US$17.6bn in AUM thanks to swelling retail participation
Leveraged and inverse products have proved very popular and make up 4% of the market
The Taiwan Stock Exchange has been crucial in lobbying for ETF-friendly reform
Taiwan's ETF market witnessed a robust growth over the past few years with local asset managers doubling their ETF AUMs to reach an all-time high at NT$541 billion (US$17.62 billion) in September, driven by ongoing market reform and increasing trading volume.
Taiwan Stock Exchange (TWSE) expects ETFs will continue to play an important role for asset allocation going forward and the market will be buoyed by impetuses such as the introduction of new trading mechanism and new innovative products.
Taiwan's ETFs mark its 15th anniversary this year. Overall, the market has made significant headway in product diversification and asset growth since Yuanta Securities Investment Co (Yuanta SITC) launched the first Taiwan ETF, Polaris Taiwan 50 Tracker Fund, in 2003.
However, the growth was not in a plain sailing in retrospect. The ETFs were struggling to draw investors' attraction in the early days due to lack of product diversity.
Noticeably, retail investors were not very eager to wager on ETFs initially as they were not familiar with the products. The low retail participation was also a factor to deter many of the Taiwanese managers from developing ETF products.
Including the Polaris Taiwan 50 Tracker Fund, only 20 ETFs were launched in Taiwan between 2003 and 2011, gathering about NT$126 billion in total AUM. The majority of the products are broad-based products benchmarking against major local and overseas indexes.
But the ETF market structure began to gather momentum in recent years particularly as Taiwan's financial authorities step up to reinvigorate the market by launching initiatives such as relaxing regulation, encouraging product innovation, promoting market liquidity, and strengthening investor education.
Boosted by the regulatory loosening like the approval of inverse and leverage ETFs in 2014, the total number of ETFs has significantly grown from 37 in 2015 to 136 currently while the total AUM surged from NT$206 billion to NT$541 billion, according to data from TWSE.
More importantly, the market landscape has evolved from being dominated by Yuanta SITC to becoming more fragmented with 12 players in place.
In addition, average daily ETF trading value increased from NT$1.7 billion in 2014 to NT$8.1 billion in September 2018, while total trading value grew from NT$434 billion for the full year in 2014 to NT$1.47 trillion in the first nine months this year.
TWSE President Lih-Chung Chien points out that the exchange has launched a number of measures to beef up market liquidity and trading flexibility in recent years, for example, the introduction of ETF dual trading mechanism in 2016 as well as the approval for cash creation/redemption for domestic equity ETF in 2017.
Looking forward, he expects The ETF market's growth trajectory will continue, saying that the exchange will look into various areas such as index innovation and cross-border partnerships to further facilitate the development.
TWSE established its index subsidiary, Taipei Index Plus Corporation (TIP), in 2016. TIP and TWSE have launched four environmental, social and governance (ESG)-related indexes to promote sustainable investing.
Some of the ESG indexes have been used by institutional investors such as the Labor Pension Fund, Taiwan's largest public retirement scheme, as the underlying benchmark for their passive investment mandates. The bourse will license more indexes to asset managers to facilitate ETF investment in future, Mr Chein says.
"Also, TWSE will strengthen the tie-up with overseas counterparts to jointly create innovative indexes," he adds.
On ETF diversification, Mr Chien believes new offerings will diversify the scope of index products and provide more options to investors.
For example, the Financial Supervisory Commission, Taiwan's financial regulator, granted the approval for the introduction of exchange-traded note (ETN) products in June.
ETNs are unsubordinated debt securities issued by securities firms.
"The exchange has published regulations governing ETN listing and trading, and the first product," he expects the first ETN to roll out in the second quarter of 2019.
He described the existing ETF line-up in Taiwan as "very diversified" with the emergence of products such as bond, commodities and inverse and leverage funds in recent years.
"These ETFs are able to serve different investment purposes," he said. "For example, fixed income ETFs serve as (an) essential tool for asset allocation, and foreign equity ETFs offer exposure to (the) global equity market."
He says the exchange plans to implement a "continuous trading mechanism" in March 2020 to replace call auctions with regular trading sessions.
"The introduction of the continuous trading will help smoothen ETF transactions," he says.