EWT: There Are Better Options Than This ETF

seekingalpha07-30

EWT ETF is an exchange-traded fund that tracks the performance of Taiwanese stocks.There are several catalysts for further growth of Taiwanese equities.However, the EWT ETF doesn't look particularly ...

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Chansak Joe/iStock via Getty Images I see at least a couple of reasons why iShares MSCI Taiwan ETF (NYSEARCA:EWT) may continue to grow. However, I'd focus on geopolitical risks before investing in Taiwanese equities. At this point, the risk-reward ratio doesn't look attractive to recommend buying Taiwanese stocks, in my opinion.  Moreover, if you got excited about the performance of the crown jewel of the Taiwanese economy, TSMC (NYSE:TSM), then you may probably check out other Taiwanese equities, including the EWT as a Taiwan-themed ETF. Nonetheless, it turns out that Taiwanese equities in general demonstrate way less exciting performance compared to TSMC. Therefore, I give a \"Sell\" rating for the EWT as there's not much that could justify buying or even holding it. EWT ETF Overview The iShares MSCI Taiwan ETF (EWT) is a passively managed ETF that tracks the MSCI Taiwan 25/50 Index, which is focused on large and mid-cap segments of the Taiwanese equity market. The EWT ETF focuses mainly on technology and electronics companies, which is quite logical given the structure of Taiwan’s economy.   EWT ETF Holdings (Seeking Alpha) Here's a brief overview of some of the ETF's key holdings:  The biggest holding of the EWT ETF is Taiwan Semiconductor Manufacturing Company Limited, a major player in the semiconductor industry, making up 24.19% of the ETF portfolio. Hon Hai Precision Industry Co., Ltd. (OTCPK:HNHAF), also known as Foxconn internationally, accounts for 6.32% of the portfolio. The company is famous for assembling a major part of Apple's (NASDAQ:AAPL) products, such as iPhones, iPads, MacBooks, etc. MediaTek (MDTKF), the global fabless semiconductor company, comes third with 4.86% of the ETF portfolio. Quanta Computer (OTC:QUCCF) and Delta Electronics make up 2.25% and 2.05% of the portfolio, respectively. Quanta Computer produces laptops and other devices, while Delta Electronics specializes in power management solutions. The EWT ETF also includes financial companies like Fubon Financial Holding (OTCPK:FUIZF) and CTBC Financial Holding, which represent 1.89% and 1.81% of the portfolio, respectively.  In total, the top ten holdings account for 48.07% of the ETF's portfolio, with a strong emphasis on leading tech, electronics, and financial companies. With 97 different holdings, the EWT ETF captures the majority of Taiwanese publicly traded companies. There aren't many peer Taiwan-related ETFs, therefore I compared the EWT with Franklin Templeton's FTSE Taiwan ETF (NYSEARCA:FLTW).   Seeking Alpha Despite that, the EWT ETF has way better liquidity due to higher AUM, the FLTW looks much more preferable due to a way lower expense ratio of 0.19% compared to EWT's 0.59%. Geopolitics May Overshadow Macro And AI So far, Taiwan's economy has been doing fine throughout this year. Taiwan experienced a significant surge in both export and import growth in June, exceeding market expectations. Export growth reached 23.5% year-over-year (YoY) while import growth rose to 33.9% YoY, resulting in a smaller trade surplus than anticipated. Both the US and ASEAN were key export destinations, contributing to Taiwan's overall export numbers.   ING Projections indicate a likely moderation in export and import growth following June's exceptional performance. Despite this, year-on-year numbers are expected to stay strong, contributing to a 2024 GDP growth forecast of 3.8% YoY, according to ING. I see two pillars that may continue to support the growth of Taiwan's economy: AI-related demand for hardware and the global rate cut cycle. Big tech companies keep investing heavily in AI technology, with no signs of capex moderation in sight.   Sherwood Huge AI-related capex drives demand for chips manufactured by TSMC, a dominant player in the semiconductor space with cutting-edge technology for manufacturing the most capable AI chips, such as the NVIDIA Blackwell series. At the same time, central banks around the world gradually shift towards cutting interest rates. The most profound effect of rate cuts, obviously, will come from the US Federal Reserve, which is expected to cut rates around September this year.   Bloomberg Rate cuts may help boost global consumer demand, which is beneficial for the export-oriented economy of Taiwan. At the same time, investors should also keep in mind that Taiwan is at the epicenter of the geopolitical confrontation between the United States and China. It's no secret that the current Chinese leadership is seeking a \"reunification\" with Taiwan. The most recent developments indicate that the Chinese authorities are slowly yet steadily preparing for any scenario of \"reunification\", including a military one. A hypothetical military confrontation between China, Taiwan, and the US (Taiwan's biggest ally) is a main long-term risk for Taiwanese equities and a source of volatility in the short term due to regular tensions in the South China Sea. There's a bipartisan consensus in the US around a so-called containment policy towards China. Amid the upcoming presidential elections in the US, such context predetermines a harsh stance of both presidential candidates in the US, which negatively affects US-China relations even more. I expect that as the US presidential elections approach, the US rhetoric relative to China will keep escalating, making investors nervous about the fate of Taiwan among other things. It should be also noted that the US supplies Taiwan with weapons and defensive equipment, which is an important variable in a tricky geopolitical setup between the US, Taiwan, and China. Overall, the real impact of geopolitics on Taiwanese stocks remains rather limited so far, though this may radically change at some point in the future. EWT ETF vs. TSMC: There's A Clear Winner Comparison of the EWT ETF to its major holding, the TSMC, is an important example of why country-wide diversification may not work well for investment returns. As you can see from the chart below, the long-term performance of TSMC is absolutely superior to the rest of the Taiwanese equities in the face of the EWT ETF.   TradingView Given that both TSMC and Taiwan's economy in general share mostly the same risk profile, you don't gain much as an investor from diversification across the whole Taiwanese equity market. The Bottom Line Sticking with the best performers is sometimes better than achieving diversification, in my view. This is exactly the case with the EWT ETF, where getting more diversified exposure to the Taiwanese stock market results in inferior performance with the same geopolitical risks compared to simply buying the TSMC stock.  As for geopolitics, it's a no-brainer that not only Taiwanese equities could suffer from a major military escalation in the Taiwan Strait, though Taiwan will definitely suffer the most. As someone who covered Russian equities here on Seeking Alpha in the past, I'd like to say that dismissing geopolitical risks is one of the most costly things that may happen to your portfolio.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2455619860"}