Taiwan braces for ETF race

Which idea will succeed: mid-caps or tech?
TaiwanÆs first exchange-traded fund, launched in 2003 by Polaris International Investment Trust, turned out to be a big hit. Now Polaris and rival, Fubon Investment Trust, are about to launch the next two ETFs, and their backers are hoping for an equally impressive run.

The 2003 Polaris Taiwan Top 50 Tracker Fund (TTT) now has about $1 billion of assets under management and has enjoyed steady asset accumulation even as the Taiwan stock market has flat-lined, says Patrick Wong, vice chairman at Polaris in Taipei.

The ETF tracks an index of the marketÆs biggest stocks by capitalisation compiled by FTSE and the Taiwan Stock Exchange. It got a huge lift initially by government-controlled pension funds and the National Stabilization Fund. At the time, the government wanted to use TTT to offload the stabilization fundÆs accumulated holdings in Taiwan Inc without disrupting the market, mimicking Hong KongÆs use of its Tracker Fund managed by State Street Global Advisors.

SSgA had also served as PolarisÆ advisor. A similar attempt to introduce an ETF by Fuh-hwa International Investment Management, then backed by BGI, didnÆt win regulatory approval.

This month should see the second and third ETFs launched. Polaris is returning with the Mid-cap 100. ôWe already have the Taiwan 50,ö Wong says. ôThe Mid-cap index covers the next 100 companies by market cap, and together gives you exposure to 75% of the market.ö

Marketing efforts will be directed more towards global investors. ôForeigners can buy Taiwan large-cap companies, but itÆs hard for them to research mid-caps,ö Wong says.

But Fubon hopes to pip Polaris and introduce its TSE Taiwan Technology Index ETF first. ôItÆs a race,ö says an executive at FubonÆs investment trust arm. He thinks FubonÆs ETF will be more successful. ôTechnology is what the Taiwan market is all about,ö he says.

Fubon will target raising an initial NT$4 billion ($123 million) within the tech ETFÆs first month, and NT$8 billion by the end of 2006. The Fubon exec thinks there is a lot of potential to market these ETFs to local institutional investors, as well as retail. ôLocal institutions havenÆt played with ETFs yet,ö he says.

Bank of New York is advising FubonÆs ETF effort, but Fubon is now also working with BGI to develop new products, particularly with index vendors Dow Jones, MSCI and Standard & PoorÆs.

FTSE has been the market pioneer, customizing indices for all three ETFs, but its international rivals have taken notice and are now looking at ways to develop product onshore, say fund execs in Taipei. ôIf they can denominate products in New Taiwan dollars, it can be attractive,ö one notes.
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