TAIPEI (Taiwan News) — Taiwan’s Central Bank has raised concerns over the rapid expansion of the domestic exchange-traded fund market, warning that unchecked growth could pose risks to investors and the broader financial system.
ETFs are investment funds managed by firms that track specific market indices, often distributing dividends to shareholders. For instance, Taiwan’s Yuanta/P-shares Taiwan Top 50 ETF (0050) invests in the 50 largest Taiwanese companies.
By purchasing ETF shares, investors gain fractional ownership in these companies, becoming shareholders. Profit given back to shareholders in the form of cash or stocks are dividends.
In its latest Financial Stability Report, the bank highlighted vulnerabilities in ETFs such as premium-discount fluctuations, tracking errors, fund liquidation risks, and liquidity challenges. It also pointed to systemic risks including market concentration and procyclical investment behavior, where investment inflows increase during economic growth and decline during downturns.
Taiwan’s ETF market has expanded significantly in recent years, supported by favorable market conditions, investor interest in high dividends, and expectations of lower US interest rates. By 2024, ETF assets reached NT$6.4 trillion (US$214 billion), rising 32-fold from NT$202 billion in 2015.
The number of ETF products increased from 34 to 260. The investor base grew 60-fold from 240,000 to 14.4 million.
This growth has made ETFs a significant component of Taiwan’s stock market in both asset size and trading volume.
While ETFs offer accessibility and diversification benefits, the bank cautioned about recent trends. It noted cases where investors withdrew time deposits or borrowed funds to invest in high-dividend ETFs, highlighting the need for prudent risk management.
The report also criticized certain asset management practices, such as using reserve funds to sustain dividend payouts or frequent portfolio adjustments aimed at boosting short-term yields. These strategies could increase costs, lower long-term returns, and negatively affect investors.
In March 2023, Central Bank Governor Yang Chin-long (楊金龍) warned about herd behavior among investors, which can amplify market volatility. The latest report reaffirmed that such herding effects, or collective action in response to market trends, are a well-known risk factor in financial markets.
Taiwan currently lacks specific legislation governing ETFs. Oversight falls under broader financial laws related to securities investment trusts and trading, supplemented by industry guidelines.
The Financial Supervisory Commission has taken steps to strengthen sector supervision. The Central Bank said it will continue monitoring the ETF market from a macroprudential perspective and coordinate with the commission to help maintain market stability.
