ETFs
Taiwan’s central bank warns of systemic risks from rapid ETF growth
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Taiwan’s central bank predicts the impact of locally listed equity exchange-traded funds will “certainly continue to increase” as it issues a new warning to retail investors over systemic risks associated with the rapid growth of the local securities market. AND F.
Following a meeting of its joint supervisory committee on June 13, the Central Bank of Taiwan published a report analyzing the impact of the ETFs Taiwan stock market boom in March and April.
The report concludes that Taiwanese investors’ active participation in the stock market, including purchasing high-dividend ETFs, has pushed Taiwanese stocks to record highs.
The continuation of purchases of Taiwan Shares of local asset managers also played a major role in the stock market’s rise, with NT$349.9 billion ($10.8 billion) invested as of June 7, while foreign investors did not invested only NT$45 billion in Taiwanese stocks.
This article was previously published by Set Asia on firea title belonging to the FT group.
Total assets of Taiwan-listed ETFs fell from just NT$755.6 billion at the end of 2018 to NT$4.78 billion at the end of April, according to the central bank.
However, the growth of domestic stock ETF assets was exponential during the same period, from NT$107.1 billion to NT$1.92 billion, “far exceeding” the growth rate of 120% of Taiwan’s stock market value.
Taiwan stock ETFs accounted for 2.71 percent of the local stock market at the end of April, according to the central bank. The average daily turnover of Taiwan stock ETFs accounted for about 2.14 percent of the total stock market last year and that figure rose to 3.09 percent in the four months ending at the end of April this year.
“Although this percentage is not high, given the rapid growth in asset size and investor participation, [local equities ETFs’] The influence on the stock market will definitely increase in the future,” the central bank said in the report.
The central bank also advised government authorities to closely monitor the ETF market and educate retail investors to invest rationally.
“Many Taiwanese investors who invest in high dividend ETFs only focus on paying high dividends but ignore the price risk,” the bank said in the report.
“Regulators should step up investor education to remind retail investors not to blindly enter and exit the market, so that they can avoid losses,” he adds.
Taiwan’s stock market has risen 21.9 percent this year as of June 7, with electronics stocks, which account for 60 percent of the weighting, jumping 28.6 percent.
The craze for high-dividend ETFs reached a fever pitch in March, following reports that retail investors were withdrawing money from their term deposits at banks and even applying for loans to subscribe to the new ETFs .
Taiwan’s largest local ETF issuer, Yuanta Funds’ new high-dividend ETF, raised NT$175.2 billion in just five days, breaking the previous initial ETF fundraising record by more than five times on the market.
The central bank’s report released last week suggests that the rapid growth of the local ETF market could bring big risks to the stock market, including concentration risks and tracking errors.
The central bank said the primary market trading mechanism used by ETFs, which involves simultaneous trading of component stocks, could reduce the risk diversification effect and increase systematic risk in the financial market.
Additionally, if investors rush to buy or sell Taiwan stock ETFs, the constituent stocks held by multiple ETFs could experience increased price volatility in the short term.
*Ignites Asia is a news service published by FT Specialist aimed at professionals working in the asset management industry. Trials and subscriptions are available at ignitesasia.com.