Will Historic Trade Deal Boost Taiwan ETFs?

by on June 29, 2010 | ETFs Mentioned:

Ever since the days of Mao Zedong and Chiang Kai-shek in the late 40′s and early 50′s, mainland China has had a strained relationship with Taiwan. In recent years, however, the economic ties between the regions have improved considerably. The recent economic crisis, as well as efforts from Taiwan President Ma Ying-jeou, have pushed the two historic rivals closer together. In fact, one could argue that in the past two years more has been done to bring the two together than in the previous twenty. This trend continued with an announcement today of a historic deal between the two rapidly-growing economies. China will cut duties on fuel oil, copper foil and about 500 other Taiwanese goods that account for about $13.8 billion of annual. Meanwhile, Taiwan will lower tariffs on 267 items from China that account for close to $3 billion, or roughly 10.5% of the China’s exports to the island nation.

The move comes after China signed a similar deal with the Association of Southeast Asian Nations that lowered tariffs on two-way trade earlier this year. The deal forced Ma’s hand, since he did not want his export dependent country (by some estimates exports make up two-thirds of Taiwan’s economy) to be at a disadvantage in the quickly growing Chinese market. In addition to boosting relations with the mainland, Ma’s administration believes that this deal will create more than a quarter million jobs annually and boost economic growth by a whopping 1.7% a year.

For investors with a bullish outlook on the Taiwanese economy, there are multiple ETF options offering cheap and efficient exposure. Below, we profile two ETFs offering pure play exposure to the Asian economy [also see ETF Plays On The Next Developed Markets]:

iShares MSCI Taiwan Index Fund (EWT)

EWT offers investors exposure to large and giant cap companies that are domiciled in Taiwan; it allocates about 35% of assets to giant caps and just over 40% to large caps. Top holdings include technology giant Taiwan Semiconductor (13.8%) and Hon Hai Precision (9.4%), known as the parent company of Foxconn, the outsourcing firm in charge of many of the factories in China that have experienced severe labor problems as of late [see more on EWT's individual holdings here].

In terms of sectors, EWT focuses on hardware (42.6%), and consumer goods (23.5%), reflecting the composition of the overall Taiwanese economy. Despite the fund’s large allocation towards hardware, it offers a minimal weighting in software (0.1%) as well as nothing in the media or health care sectors. The fund is up 12.5% over the past 52 weeks but it is down sharply by close to 2.4% in early morning trading today despite the good news on the trade deal.

IQ Taiwan Small Cap ETF (TWON)

TWON takes a much different approach to investing in the Taiwan market than its larger and more established counterpart. This small cap fund tracks the IQ Taiwan Small Cap Index and currently holds about 100 securities in total. The fund has a heavy focus on technology companies (30.3%), industrials (27.7%), and materials (18.3%). Much like its larger counterpart, it has a minimal allocation towards energy (0.8%) and health care (0.5%) firms. The fund has an average market capitalization of only about $500 million and an expense ratio of 0.79% [see more fundamentals of TWON here]. TWON is a relatively new fund and is down about 3% since its inception earlier this year. Much like the rest of the market, it has slid today despite the positive trade deal, sinking by 2.2% in morning trading [see more information on TWON's launch here].

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Disclosure: No positions at time of writing.