IndexIQ announced on Tuesday the launch of the IQ Taiwan Small Cap ETF (TWON), the firm’s fourth product focusing on international small cap stocks. TWON will track the IQ Taiwan Small Cap Index, a cap-weighted benchmark that includes small cap companies domiciled and primarily listed on stock exchanges in Taiwan. The underlying index consists of approximately 100 securities with a weighted average market capitalization of less than $500 million. Like other funds offering exposure to Taiwan’s equity markets, TWON will have a heavy tilt towards tech firms; the technology sector makes up about 30% of assets, followed by industrials (28%) and materials (18%).
Case For Taiwan
Once one of the four “Asian Tigers,” Taiwan’s economy has continued to expand at an impressive rate in recent years. The economy may have expanded at its fastest rate in 20 years in the first quarter of 2010, fueled by strong exports and direct access to the mainland Chinese market. The impressive expansion and modernization of Taiwan’s economy has, according to some index providers, pushed the nation into “developed” status; others continue to include it as a component of emerging markets benchmarks (see one interesting take on this issue in this Q&A piece).
Taiwan is home to some of the world’s most important and advanced technology manufacturing operations, making it one of the global tech and electronics hubs. But the country is now also turning its focus to renewable energy, launching several initiatives aimed at giving the country a leg up in the green energy race.
The Small Cap Difference
TWON isn’t the first ETF offering exposure to Taiwan; the iShares MSCI Taiwan Index Fund (EWT) has been around for years and currently has almost $3 billion in assets. But TWON’s focus on small cap stocks will give it a unique risk/return profile. Like most international ETFs, the index underlying EWT consists primarily of mega cap stocks–the largest and most liquid Taiwanese equities. While these companies are headquartered and listed in Taiwan,many of them generate earnings from around the world. As such, mega cap-dominated ETFs tend to be less of a pure play on the local economy and exhibit a higher correlation with international markets.
“In our view, domestically-oriented small capitalization companies provide one of the best vehicles for investors seeking to build exposure to the internal dynamics of an emerging market economy,” said Adam Patti, chief executive officer at IndexIQ. “Taiwan has been growing rapidly for many years, and is well-positioned to continue to expand.”
Moreover, oil and gas firms and financial institutions tend to make up a larger proportion of mega cap companies than do tech and consumer companies, giving these ETFs a bias towards certain sectors of the economy they represent. (Taiwan isn’t a great example of this, but a comparison of the holdings of EWZ and the holdings of BRF illustrates the point quite well.)
In recent months IndexIQ has rolled out ETFs focusing on small cap stocks in Australia (KROO), Canada (CNDA), and South Korea (SKOR). A number of other issuers have also introduced small cap funds covering an increasingly large portion of the global economy (use the ETF Screener to identify all small cap ETF options):
TWON will charge an expense ratio of 0.79%, but the prospectus also notes that foreign taxes will be incurred over time as well. At an estimated rate of 0.12%, TWON’s “all-in” expense ratio is 0.91%.
Disclosure: Long BRF.