Taiwan has become one of the world's most successful economies over the past several decades, thanks to its favorable economic policies and proximity to China. With a gross domestic product (GDP) of $887 million in 2011, the country's economy is the 19th largest in the world by purchasing power parity, making it extremely important for international investors.
Taiwan's Promising Economy
Taiwan's economy is perhaps best known for its electronics industry. Since the 1960s, the country has evolved to become a leader in many areas of electronics, including the manufacturing of integrated circuits for computing. The country's exports totaled more than $300 billion in 2011 to primarily China, Hong Kong and the U.S.
International investors are attracted to Taiwan for a number of different reasons. The majority of the newly industrialized country's economy is made up of small and medium-sized businesses, inflation has remained in check, unemployment is low, there's a significant trade surplus, and foreign reserves are the fourth largest in the world.
Public companies in Taiwan are traded on the Taiwan Stock Exchange, which had around 800 companies listed with nearly TWD 24 million in combined market capitalization in late 2010. The two most popular indices used by investors are the FTSE Taiwan Index and the MSCI Taiwan Index, which both track major publicly traded companies in the country.
Investing in Taiwan with ETFs
The easiest way to invest in Taiwan is using exchange-traded funds (ETFs), which offer instant diversification in a U.S.-traded security. With net assets of over $2.5 billion, as of December 2012, the iShares MSCI Taiwan Index ETF (NYSE: EWT) is the most popular option for investors looking for exposure to Taiwan's growing economy.
The ETF holds approximately 117 different companies with a modest 0.59% expense ratio, but the largest company accounts for 20% of the fund's holdings, while information technology companies in general account for over 54% of the portfolio. As a result, investors may want to exercise caution when purchasing the ETF due to somewhat limited diversification.
Investors looking for an alternative may also want to consider purchasing American Depository Receipts (ADRs), which are U.S.-traded securities in foreign companies. Some popular ADRs trading in the United States include:
- Taiwan Senticonductor Manufacturing Co., Ltd. (NYSE: TSM)
- China Steel Corporation (PINK: CISXF)
- Asustek Computer Inc. (PINK: AKCPF)
Benefits & Risks of Investing in Taiwan
Taiwan represents an attractive destination for international investors, but there are several risks that should be carefully considered before committing capital.
Benefits of investing in Taiwan include:
- Solid Fundamentals. Taiwan is a newly developed country that has very favorable fundamentals, including low inflation, low unemployment, consistent trade surpluses, and high foreign reserves that can help shield it from problems.
- Diversified Trade Partners. Taiwan has diversified away from the United States over the past several years, moving from 49% of its exports in 1984 to just 20% by 2002. Improving Chinese, Southeast Asian and European end markets are also helping.
Risks of investing in Taiwan include:
- Strong Exposure to China. Taiwan's economy is heavily dependent on China's growth, given that the neighbor accounts for roughly 28.1% of its exports and 14.2% of its imports, meaning that any slowdown in China could have an adverse effect.
- Geopolitical Risks from China. Taiwan's close proximity to China has resulted in a number of geopolitical issues over the past several decades. However, "re-taking" Taiwan has not been a political goal since 1992.
Taiwan offers investors a unique opportunity to invest in a modern economy that benefits from its proximity to China and Southeast Asia. With a diverse high-tech economy, low inflation, and low unemployment, international investor may want to consider investing in this market using the iShares MSCI Taiwan Index (NYSE: EWT) or any number of the country's ADRs.