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  • Writer's pictureNelson Huang

Taiwan Bond ETF, the day after tomorrow

Updated: Sep 8, 2021

Earlier this year, NIC have published a thorough article sharing our observation with Taiwan Bond ETF market. Several months have passed and there are some changes with the related regulation ,thus the market are performing differently recently. We will be looking into the scale, investors, product design changes and how are these changes correlates with changes in regulation.

Bond ETF AUM skyrocketed this year

The scale of Bond ETF has been growing real fast in the past two years and has reached $34,561 USD at the end of Aug. 2019, 2.82x compare to 2018 year end. The fundamental demand for Bond ETF in Taiwan are from insurers, the major investors that make Bond ETF skyrocketed. The start of this drastic surge in Bond ETF was due to insurers’ regulation dodge to circumvent the 45% upper overseas investment limit. There is a 10% investment limit on each insurers’ investment on single mutual fund. Onshore Bond ETFs, on the other hand, classified as onshore securitized product and can be invested beyond 10% limit. (Offshore ETFs are still classified as mutual fund and thus a 10% limit is applied.) In addition to regulation, outstanding performance in bond assets, especially IG bonds, encouraged investors flooded into Bond ETFs. If we take a closer look at the Taiwan Bond ETFs that exceeds USD 1bn, most of them focus on IG or Financial Debt, have showed a strong performance with 17% NAV increase. Of course TWD depreciation also played a role in this parade, favoring non-hedged TWD products.

Recent growth in Bond ETF AUM is slowing down

If you are paying close attention to Taiwan’s ETF market, you must know the regulation, issuers, growth and scale have been going through some changes. If we take a closer look at the recent months, MoM AUM growth has been slowing down from 25% in Jan. to 11.4% in Aug..

FSC’s concern is the key

The people who have done business with Taiwan insurance companies won’t be surprised

Serving as one of insurer’s investment tool, Bond ETF’s investors are quite concentrate. Many individual life insurers fully subscribed single fixed income ETFs during their IPOs and that raised FSC’s concern. A concentrated investors portfolio may cause lack of liquidity in ETF market. In May, chairman of FSC, Wellington L. Koo, launched new measure that limit the investment by a single investor in an ETF IPO at no more than 50%, and required to further reduced to 30% in six months after IPO. For existing Bond ETF investors, a reduce of 5% is required every six months till the holding of single ETF is less than 30%. Also, quite new regulation direction is not allowed SITEs company to launch ETF products consequently. Therefore, a dramatic decrease in the number of new launches shows the booming of Bond ETF is no longer exist. The drastic surge in Bond ETF was due to insurers’ regulation dodge to circumvent the 45% upper overseas investment limit. There are still several ETFs issuance on the way. However, after a drastic issuance of all kinds of ETF products, the market are now closer to saturation, we believe that the winners will still be those who actually identify and fulfill insurer’s needs.

From Separation to Unity

Consolidate may be the next move. There are 12 Bond ETFs exceed USD 1 billion at the end of Aug. Most of the ETFs focus on corporate bonds, financial bonds and EM sovereign bonds. However, if we look into the smallest 12 ETFs, none of them exceeds a scale of USD 10 million. Since many SITEs have issue similar ETFs and not all of them make a hit on IPO, it is very likely that the ones with insufficient liquidity nor special characteristic will loose its market share. The regulation of investors diversification also makes it harder to increase AUM and trading volume. There are 90 ETFs on the board at the moment, and we are expecting a market trend from separation to unity.

NIC closely monitors Taiwan investment market and we are always welcome for discussion. If you are interested in more details, please feel free to contact us.


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