Joining the likes of Korea and Japan, Taiwan welcomed its first inverse and leveraged exchange-traded funds on Friday, and others are in the pipeline. These will be joined by the country’s first commodity ETFs next year, later than initially planned.
Yuanta Securities Investment Trust Company (SITC), by far Taiwan’s biggest ETF manager, was first to market with the new types of product. Meanwhile, Fubon SITC is raising capital for leveraged and inverse ETFs tracking the SSE180 index, which are expected to list at the end of this month.
Taiwan’s Financial Supervisory Commission (FSC) wants to boost capital market activities, as secondary market turnover, margin trading and index volatility have been low for a long time, said Julian Liu, chief executive of Yuanta SITC. Volumes there are lagging those of China and Hong Kong, he added, particularly in light of the impending Shanghai-Hong Kong Stock Connect scheme.
“As Yuanta are the dominant ETF provider in Taiwan, it is likely they will gain a lot of support for this locally,” said Stewart Aldcroft, Hong Kong-based chief executive of CitiTrust. “The key will be not just the AUM raised but also the average daily turnover after launch.”
Yuanta’s new ETFs target retail investors in the index futures market, who use them as short-term tactical trading instruments, said Liu. The new funds – Yuanta Daily Taiwan 50 Bull 2x ETF and Yuanta Daily Taiwan 50 Bear -1x ETF – raised a total of NT$2.65 billion ($86.9 million) from their IPO.
Meanwhile, Fubon SITC started raising capital today for its own inaugural leveraged and inverse ETFs, which will track the Shanghai Stock Exchange 180 Index. The funds will be the first such products providing access to domestic A-shares.
The other two ETF managers in Taiwan – FuhHwa and SinoPac – have also expressed interest in developing inverse and leveraged products.
The Taiwan Stock Exchange (TWSE) is optimistic about the potential for the products in Taiwan given the traction they’ve gained in Korea.
In September 2014, inverse and leverage ETFs comprised 17% of ETF assets overall, yet accounted for 56% of average daily ETF trading volume, according to London-based research firm ETFGI. There were nine leveraged/inverse ETFs listed on Korea Exchange (KRX), with total AUM of W3.78 trillion ($3.5 billion) as of November 3.
Moreover, Taiwan has moved ahead of China and Hong Kong as an ETF hub when it comes to these products, Liu noted, as the latter regulators do not yet allow them.
It is possible in the near future that Hong Kong’s Securities and Futures Commission will permit a very bland type of leveraged fund, but it is currently taking a restrictive stance, said sources.
Jackie Choy, ETF strategist at investment consultancy Morningstar, noted: “Hong Kong capital market has the depth and breadth to include these leveraged/inverse ETFs.”
The issue of investor protection is also important in Taiwan, said Yuanta's Liu. Not all investors there are allowed to trade inverse/leveraged ETFs – to be eligible, they must have traded stock warrants, futures or options more than 10 times in the previous 12 months.
A TWSE spokesperson pointed to lessons learned from the US, where lawsuits happened due to investors’ misunderstanding of daily compounding effects in leverage/inverse ETFs, resulting in unexpected losses.
Meanwhile, the Taiwanese authorities plan to diversify the available product range to include commodity ETFs. Yuanta had planned to launch a gold ETF and a crude oil ETF in September and December respectively this year, but that looks to have moved to next year now.
TWSE said it plans to introduce ETFs tracking gold futures in 2015 and is working on ETFs denominated in foreign currencies.
There are 23 ETFs listed on the TWSE today, which comprised 3.72% of the exchange’s trading volume as of October 31.