The AI frenzy is driving a surge in Taiwan’s ETF market, raising concerns among analysts and regulators about the market’s stability.
What Happened: The Taiwan ETF market has seen a significant influx of capital as investors seek exposure to the AI supply chain, Reuters reported. This has led to a shift in the ownership structure of the $2 trillion market, which is a geopolitical flashpoint.
The ETF sector in Taiwan, valued at T$4.74 trillion ($145.8 billion) as of March, has seen a 77% increase from the previous year. This growth far outpaces the 20% rise in the benchmark equity index.
However, the rapid inflow of investments, much of which is leveraged, has raised concerns about a potential market reversal. Regulators and ETF managers worry that less experienced investors could face significant losses if the market sours or geopolitical tensions with China escalate.
“Our clients have concerns. Taiwan stocks have risen above 20,000 points. How much higher can they go?” said Peter Yang, manager of an ETF launched by Fuh-Hwa Securities Investment Trust.
ETFs in Taiwan include broad index trackers, dividend funds, and thematic and sector funds, and are popular among both local and foreign investors.
The market’s vulnerability was evident when Middle East tensions and a warning of subdued global demand from industry leader Taiwan Semiconductor TSM triggered a wave of selling in chip stocks.
“Generally investors see ETFs as investments that will always be profitable. That is not necessarily correct. However, in the longer term, Taiwan and U.S. ETFs in this sector can be expected to reliably trend upwards because of the tremendous potential of new applications such as AI,” said Peter Hong, manager of Capital TIP Customised Taiwan High-Tech Dividend & Growth ETF.
However, the market’s stability is now being questioned as the AI stock rally has become fickle and volatile. This surge in ETF investments is also raising concerns about the potential impact of any shifts in chip demand and geopolitical risks on the market.
“ETFs mostly track the broader market, making them vulnerable and unprotected when there is volatility in the market,” said Adrian Wang, a senior vice president of Cathay Securities Investment Trust.
The iShares Inc iShares MSCI Taiwan ETF EWT has demonstrated a remarkable 1-year return of 23.99%, making it one of the standout performers in the Taiwan-focused ETF market.
Why It Matters: The surge in Taiwan’s ETF market is largely driven by the AI stock craze. This fervor has seen investments in local stock ETFs surpass $50 billion, with the local benchmark index climbing by 30% in the past year, largely attributed to a 55% gain by TSMC, a major semiconductor supplier for Apple and NVIDIA.
The AI industry’s expansion is driving a surge in demand for crucial components, such as high-bandwidth memory (HBM) chips, used in AI chipsets. This has led to a significant increase in the price of chips manufactured outside of Taiwan, prompting TSMC to adjust its pricing model.
Despite these challenges, TSMC announced the launch of its new chip manufacturing technology, “A16,” in 2026, positioning the company against Intel in a competition to produce the world’s fastest chips.
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