Taiwan has become one of the world's most successful economies over the past several decades, thanks to its favorable economic policies and proximity to China. With a gross domestic product (GDP) of $1.143 trillion in 2019, the country's economy is the 22nd largest in the world by purchasing power parity (PPP), making it extremely important for international investors.
In this article, we will take a look at Taiwan's promising economy and how investors can gain exposure through exchange-traded funds (ETFs), as well as some important risk factors to consider.
- Taiwan is newly industrialized and shows many signs of future economic growth and stability.
- Exchange-traded funds (EFTs) and American depository receipts (ADRs) are two of the more common methods to invest in Taiwan.
- Taiwan is financially solid and less reliant on single export streams to the U.S. than it once was, which investors find appealing.
- Taiwan's geopolitical and economic ties to China bring increased risk to investing there.
Taiwan's Promising Economy
Taiwan's economy is perhaps best known for its electronics industry. Since the 1960s, the country has evolved to become a leader in many areas of electronics, including the manufacturing of integrated circuits for computing. The country's exports totaled more than $388.49 billion in 2019, primarily to China, Hong Kong, and the U.S.
International investors are attracted to Taiwan for a number of different reasons. The majority of the newly industrialized country's economy is made up of small and medium-sized businesses, inflation has remained in check, unemployment is low, there's a significant trade surplus, and foreign reserves are the fifth largest in the world.
Public companies in Taiwan are traded on the Taiwan Stock Exchange, which had around 942 companies listed, with nearly TWD 36 million in combined market capitalization, by the end of 2019. The two most popular indices used by investors are the FTSE Taiwan Index and the MSCI Taiwan Index, which both track major publicly traded companies in the country.
Investing in Taiwan with ETFs
The easiest way to invest in Taiwan is by using exchange-traded funds (ETFs), which offer instant diversification in U.S.-traded securities. With net assets of over $6.4 billion, as of the spring of 2021, the iShares MSCI Taiwan Index ETF (NYSE: EWT) is the most popular option for investors who are looking for exposure to Taiwan's growing economy.
The ETF holds approximately 89 different companies with a modest 0.59% expense ratio, but the largest company accounts for 21.38% of the fund's holdings, while information technology companies, in general, account for 62.86% of the portfolio.
Investors may want to exercise caution when purchasing the iShares MSCI Taiwan Index ETF due to somewhat limited diversification.
Investors who are looking for an alternative may also want to consider purchasing American depository receipts (ADRs), which are U.S.-traded securities in foreign companies. Some popular ADRs trading in the United States include:
- Taiwan Semiconductor Manufacturing Company, Ltd. (NYSE: TSM)
- China Steel Corporation (PINK: CISXF)
- Asustek Computer Inc. (PINK: AKCPF)
Benefits and Risks of Investing in Taiwan
Taiwan represents an attractive destination for international investors, but there are several risks that should be carefully considered before committing capital.
Benefits of investing in Taiwan include:
- Solid Fundamentals: Taiwan is a newly developed country that has very favorable fundamentals, including low inflation, low unemployment, consistent trade surpluses, and high foreign reserves that can help shield it from problems.
- Diversified Trade Partners: Taiwan has diversified away from the United States over the past several years, moving from 32% of its exports in 1990 to just 14.1% by 2019. Improving Chinese, Southeast Asian, and European end markets are also helping.
Risks of investing in Taiwan include:
- Strong Exposure to China: Taiwan's economy is heavily dependent on China's growth, given that the neighbor accounts for roughly 27.9% of its exports and 20.1% of its imports, meaning that any slowdown in China could have an adverse effect.
- Geopolitical Risks from China: Taiwan's close proximity to China has resulted in a number of geopolitical issues over the past several decades. However, "re-taking" Taiwan has not been a political goal since 1992.
Taiwan is a major producer of semiconductors, which continue to increase in global demand. Some experts view this foothold as a way for Taiwan to break free from Chinese dependence, while others raise warnings about the Taiwan's lack of diversification in exports.
Taiwan offers investors a unique opportunity to invest in a modern economy that benefits from its proximity to China and Southeast Asia. With a diverse high-tech economy, low inflation, and low unemployment, the international investor may want to consider investing in this market using the iShares MSCI Taiwan Index (NYSE: EWT) or any number of the country's ADRs.