Industry Updates

Taiwan’s $20 billion ETF market just got ETN approval

Felix Xu

a city with tall buildings and a body of water in the background

  • ETNs are coming to Taiwan, thanks to a regulatory green light

  • They will be available OTC and on some private bank's platforms

The first batch of ETNs have come online in Taiwan’s over-the-counter market. They will be available to some retail investors through financial intermediaries.

The introduction of ETNs marks a significant change for the local index product market. It will help local securities firms to diversify their product offerings into passive funds, while market pundits advise individual investors should take heed of the products’ potential risks.

The Financial Supervisory Commission, the island state’s financial regulator, recently announced ten ETN issued by nine local securities firms including SinoPac Securities, Fubon Securities, Mega Securities and President Securities, were listed on over-the-counter exchange or so-called GreTai Securities Market on April 30.

The listing comes ten months after the FSC gave the go-ahead for ETN products last June as part of a plan to facilitate the development of local index product market.

“The initiative will provide more investment options to investors, and help local securities firms to expand their business scope and groom local financial talents”, the FSC says.

Although Taiwanese investors are getting more familiar with ETFs as Taiwan has become one of the fastest growing ETF market in Asia in recent years, many local retail investors do not understand the structural difference between ETNs and ETFs.

In fact, ETNs are a type of unsecured subordinated debt security issued by securities firms with a specific maturity date. Their bond-like structure would make investors to be exposed to default and liquidity risks.

Structuring in the form of a promissory note, ETN issuers are required to deliver returns at least as good as the underlying index upon their maturity. Hence, investors are subject to the risk of issuers defaulting on their payments or being downgraded by credit rating agencies.

Liquidity risk is another concern. As ETNs are traded via a single market maker, and there are not related futures product for risk hedging.

Jackie Choy, director of ETF research for Asia at Morningstar, points out investors have to understand ETN characteristics and their counterparty risk before investing in the products.

Mr Choy believes whether ETN will be successful in Taiwan is dependent on the products’ underlying themes and investors’ risk appetites.

The nine ETN securities firms are affiliated to local financial conglomerates, and some of their parent groups have asset management arms with ETF capabilities. To avoid overlapping, securities firms tend to launch the ETN tracking something different from the ETF offerings from their sister companies.

Fubon Securities, a wholly owned subsidiary of Fubon Financial Holdings Col, has launched an ETN that tracks the TIP Customized Big Apple Total Return Index, which comprises of Taiwan’s 10 biggest suppliers of iPhone maker Apple Inc.

Fubon Securities has also rolled out another ETN product - Fubon 20 Equal Weight Total Return Index ETN.

The benchmarking allows Fubon Securities to differentiate its ETNs from the ETF products offered by its sister company Fubon Asset Management Co., one of the largest ETF providers in Taiwan.

A spokesman from Fubon Securities says many clients have shown interest in the ETN products, and they are eager to know more about the difference between ETF and ETN.

Overall, ETNs are an attractive product to investors as their price do not deviate easily from the value of their underlying stocks. Also, they have high transparency and low transaction cost, the spokesman adds.

Another ETN issuer, Masterlink Securities, is also very positive on the outlook of the ETN market, expecting the market total assets to reach NT$200 billion (US$6.46 billion) in five years.

Taiwan’s ETF market had about NT$934.6 billion of total assets as of March 2019, according to figures from the Securities Investment Trust and Consulting Association.

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