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Taiwan-Korea partnership gives birth to new ETFs

Two ETFs launched this week in Taiwan and Korea track a technology-focused cross-border index jointly developed by the two countries' stock exchanges.

Cathay Securities Investment Trust listed the Cathay Korea/Taiwan ITP ETF on the Taiwan Stock Exchange (TWSE) on 11 June. At the same time, Samsung Asset Management launched the KODEX Korea Taiwan IT Premier ETF on the Korea Exchange (KRX), according to a joint statement from the bourses.

Both ETFs track the Korea Taiwan IT Premier (ITP) Index, which was jointly developed by TWSE and KRX. Launched in September last year, the index includes IT companies listed in Korea and Taiwan. It aims to capture the market advantages of Korea’s high capital gains along with Taiwan’s high dividend yield, the statement said.

The top six constituents of the index include three Taiwanese companies: Taiwan Semiconductor Manufacturing, Hon Hai Precision Industry and Largan Precision Company, as well as three Korean companies: Samsung Electronics, SK Hynix and Naver Corporation.

The collaboration between the two exchanges dates back to December 2015, when they signed a memorandum of understanding to expand the two countries’ ETF markets, jointly compile indices, conduct market promotion activities and engage in bilateral visits to share experiences, according to a statement at the time.

The launch of both ETFs is the first tangible outcome of this collaboration, Jung Jiwon, chairman and CEO of KRX, said in the statement.

“The KRX plans to work together with the TWSE to develop more co-compiled indices and the relevant ETFs, such as high-dividend ETFs, in order to attract international investors’ interests to our capital markets,” he said.

Both exchanges are also looking at inviting other bourses to jointly create new indices, the statement added.

Taiwan’s and Korea’s ETF markets are among the most innovative in the region. Both markets were the first in Asia, outside Japan, to introduce leveraged and inverse (L&I) ETFs. In Taiwan alone, the assets in L&I products accounted for half of the country’s total ETF market as of the end of June last year, according to data from Cerulli Associates.

Korea is also the only Asian market to allow listing of active ETFs.

On the flip side, Hong Kong, despite being the second largest ETF market in Asia after Japan, has been criticised for lacking diversification, with the top five largest ETFs accounting for 71% of the whole ETF market.

However, it has made efforts to bring more innovation to the market, with the introduction of L&I products in January 2017, as well as plans to introduce active ETFs.

Part of the Mark Allen Group.