Taiwan’s Economic Landscape and US Bond ETFs
There’s an interesting situation brewing in Taiwan, especially when you look at the Big Mac index, often seen as a quirky gauge of economic health. Earlier this year, economists found that the Taiwanese dollar was the cheapest among 58 currencies, undervalued by about 58.8% against the US dollar. This disparity has been steadily increasing over the past decade, which is, well, quite alarming.
However, instead of taking this as a warning, many Taiwanese investors have been quite optimistic, investing heavily in overseas assets with the hope that local authorities would maintain a favorable exchange rate. Unfortunately, this optimism could be misplaced. The life insurance sector in Taiwan is already feeling the squeeze, and many mom-and-pop investors are nursing significant losses due to fluctuations in the Taiwan dollar.
The situation is largely attributed to Taiwan’s distinct ETF market, one of the largest relative to its population. State Street’s data reveals that the approximately $1.96 billion in ETFs accounts for about 66% of total investment fund assets at the end of 2024. To break it down, that’s about $8,400 for each person in Taiwan. Oddly enough, a large portion of these ETFs are bond ETFs.
Back in 2018, regulators tried to limit the issuance of Formosa bonds, which are bonds issued by overseas Taiwanese borrowers that cater to local investors. To avoid ownership caps, the investment sector presented the “Formosa ETF” option, essentially counting these as local stocks, even though many were actually based on U.S. bonds.
What followed was a surge of interest, especially from retail investors looking for good yields from quality U.S. Treasury and corporate bonds. From 2019 up until January of this year, Taiwanese investors funneled around $730 billion into U.S. bond ETFs. This trend had primarily targeted long-term bonds, particularly those over 20 years old. For context, as of the end of March, the entire Taiwanese bond ETF sector—domestic and international—was valued at only $94 billion.
But the sentiment seems to be shifting. Beginning in February and March, investors started pulling out their money, with around $1.1 billion withdrawn during this time. Morningstar’s early data for April indicates net outflows are accelerating, which doesn’t bode well as the Taiwan dollar fluctuates wildly.
As for the losses facing these investments, Ryan Chang, from CTBC Investments, mentioned that U.S. bonds have, unfortunately, been hit hard due to the dollar’s performance. On average, it seems that Taiwanese investors have already taken a hit of about 11-12 cents. A particular ETF—the Yuanta U.S. Treasury bond ETF—has seen a 13% drop in value since early April, primarily due to currency losses.
Since the Federal Reserve started increasing interest rates, this ETF has almost reached a point where it’s underwater since its inception in early 2017.
No surprise, the situation is deteriorating. Redemptions have increased significantly, with net withdrawals rising from $817 million in April compared to $54 million in March and $122 million in February.
While precise flows for May remain uncertain, current total assets have dropped to $7.8 billion from a peak of $9.4 billion at the end of April.
Remarkably, Taiwan’s U.S. bond ETFs are still ten times larger than they were at the beginning of 2019, signifying a considerable amount of investment despite recent setbacks. But if this trend continues, the appetite for such investments may indeed diminish, even if, well, there’s a sense of begrudging acceptance about that possibility.
