Taiwan’s regulator moves to correct ‘imbalance’ caused by ETF boom

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Amid the relentless growth of Taiwan’s exchange-traded fund market, regulators are trying to promote more active fund capabilities out of fear that the industry will begin to lose talent for managing storage funds.

Total assets in Taiwan-listed ETFs now account for 64% of the onshore fund market, up from just 37% in July 2019, having added US$4.23 billion ($131.4 billion) over the past five years .

By comparison, onshore mutual funds, which are mainly active strategies, added only about NT$840 billion in assets over the same period, according to data from the Securities Investment Trust and Consulting Association.

This year through the end of July, retail investors in Taiwan allocated NT$1.37 billion in net inflows to ETFs, compared with just NT$27 billion in net inflows to mutual funds.

This article was previously published by Ignites Asia, a title owned by FT Group.

With Taiwan’s increasingly erratic growth of passive ETFs and active strategies expected to continue, the Financial Supervisory Commission this year began looking for ways to rebalance the industry.

In January, the regulator asked fund houses to encourage the growth of actively managed mutual funds to address this “severe imbalance” as part of a proposed “vision” for the medium- and long-term development of the local asset management industry.

There should be further development of the active fund industry to “support investment talent training and product research and development in Taiwan,” the FSC said.

In April, the FSC excluded ETFs and money market fund assets to assess whether global fund firms qualify for the Deep Cultivation Plan, in which certain fund firms receive preferential treatment.

All passive funds from May were also excluded from the Incentive Scheme for Investment Trusts as the regulator sought to give active fund managers a “better chance” of preferential measures .

Chiu Jun-mao, a professor of finance at Taiwan’s National Sun Yat-sen University, told Ignites Asia that the FSC is concerned about cultivating industry talent, as the shift from mutual funds to ETFs could result in the most promising fund managers to leave the business. strategy management.

“It takes a long time to develop active fund managers and R&D talent,” he explained. “Active funds will need to maintain a certain level of AUM in order not to lose talent.”

Improving the research and analysis skills of active fund managers can also help stabilize the onshore market by reducing the herd effect of retail investors, which is “serious and relatively irrational,” according to Chiu.

“Many of them actually invest in leveraged ETFs through regular savings plans because they think they must offer good returns, but they don’t know that these products are not designed for long-term investments,” he said.

Yang Chin-Long, the governor of the Central Bank of Taiwan, also warned investors to be aware of a “herd effect” amid the fundraising boom for high-dividend ETFs earlier this year.

However, Taiwan’s FSC believes that active ETFs can counter the seemingly unstoppable shift to passive products. The FSC announced the framework for its new active ETF industry last month and expects the first batch of products to be listed as early as next year.

The regulator said in June that 15 out of 38 fund firms in Taiwan are interested in launching active ETFs, with the market expected to be worth more than NT$200 billion by the end of 2025.

*Ignites Asia is a news service published by FT Specialist for professionals working in the asset management industry. Trials and subscriptions are available at ignitesasia.com.