Taiwan reverse ETF trades surged as the stock market plunged

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As the Taiwanese stock market suffered the worst one-day decline last week, a reverse exchange-traded fund recorded its highest trading volume and became the most-traded security on the exchange.

Taiex, the weighted index for stocks listed on the Taiwan Stock Exchange, fell 8.55% on May 12, the worst intraday decline since its launch in 1969.

Market participants mainly blamed the crash on a sudden increase in reported coronavirus cases, leading to expectation that impending social distancing measures would be imposed by the government.

However, the scale and speed of the market fall was unprecedented. By the end of the day, NT $ 2.07 billion ($ 74 billion) had evaporated from securities listed in Taiwan, according to data from the Taiwan Stock Exchange.

This article has already been published by Ignite Asia, a title belonging to the FT group.

Local media reported that the country’s National Stabilization Fund Committee was ready to respond to the rout. In the meantime, the Financial Supervisory Commission also issued an announcement informing investors that it was closely monitoring market movements and that it would take appropriate action if necessary.

However, in the midst of the dramatic fall in the market, the locally listed Inverse ETF managed to record a dramatic price surge and achieve the highest daily trading volume since its inception. Inverse ETFs aim to profit from a fall in its benchmark index by investing in derivatives.

Yuanta / P-Shares Taiwan Top 50 1X Bear ETF, launched in October 2014 by Yuanta Securities Investment Trust, recorded trades worth NT $ 6.35 billion as investors rushed to hedge their bets , according to stock exchange data.

It also topped the rankings in terms of business value among all stocks listed in Taiwan on May 12.

Much of the trading activity in the Yuanta / P-Shares Taiwan Top 50 1X Bear ETF on May 12 came from investors selling their existing holdings in the ETF in anticipation of the market rebound, the research team at the ETF. Yuanta Daily Taiwan 50 Bull 2X Said ETF.

Little of this reverse ETF was redeemed on May 13 in the primary market, showing that most of those who bought the ETF on Wednesday held onto the strategy the next day, the research team said.

“Reverse ETFs have always been a tool for short selling or hedging. In a down market, it is quite normal to see more activity on these tools. But I wouldn’t say there is a cause-and-effect relationship between this ETF’s trading volume and the broader market downturn, ”said Jackie Choy, Director of ETF Research for Asia at Morningstar.

Although the trading volume of Yuanta / P shares of Taiwan Top 50 1X Bear ETF reached a record high of over NT $ 6 billion on May 12, it was still low compared to the total trading volume of 782.8 billion NT dollars in the market at large. the same day, which was also the highest in history, show data from the exchange.

Three other reverse ETFs betting against domestic stocks are available in Taiwan provided by Fubon Asset Management, Cathay Securities Investment Trust and Capital Investment Trust Corporation.

The same providers also offer a combined total of four leveraged ETFs targeting domestic stocks available to Taiwanese investors.

Leveraged ETFs allow investors to amplify the returns of an underlying index. However, when the market goes down, investors in leveraged ETFs also suffer larger losses.

Taiwan’s leveraged ETF assets have exploded over the past year. As of March 2020, all four products had assets under management of NT $ 2.9 billion. In the 12 months that followed, that figure jumped by a multiple of around NT $ 7.5 billion to NT $ 21.8 billion, according to data from the Securities Investment Trust & Consulting Association.

The four reverse ETFs saw their assets grow from NT $ 69.2 billion to NT $ 69.1 billion during the same period.

The growth of leveraged ETFs in Taiwan has been driven by institutional investors rather than retail investors.

While the number of retail beneficiaries of the four leveraged ETFs has grown from 4,230 to 1,916 in the past 12 months, the number of institutional investors has grown from 123 in March 2020 to 136 in March 2021.

* Ignites Asia is a news service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at ignitesasia.com.

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