EWT: iShares MSCI Taiwan ETF

EWT: iShares MSCI Taiwan ETF

The BlackRock iShares Morgan Stanley Capital International Taiwan, also known as iShares MSCI Taiwan (NYSEARCA: EWT), is a long-running exchange-traded fund, or ETF, that tracks the MSCI Taiwan Index. It has a simple investment strategy: track and mimic the returns of the Taiwanese equity market.

Taiwan first grabbed investors' attention in the 1970s and 1980s when it was considered one of the "Four Asian Tigers." The small Asian country has realized incredible economic growth since the 1960s, and EWT hopes to capture future growth. Historically, the Taiwanese economy is known for low labor costs and excellent production of computer technology components.

This ETF offers equity investors exposure to large- and mid-cap companies in Taiwan. BlackRock, the fund provider for EWT, estimates this ETF should carry approximately 100 holdings and represent access to nearly 85% of the entire Taiwanese stock market.

A full quarter of EWT's assets under management, or AUM, are invested in the Taiwan Semiconductor Manufacturing Corporation. The remaining holdings in the top 10 account for just over half of all assets. As far as sector weightings, EWT is heavily titled towards technology at nearly 60% of AUM.

Characteristics

Since its launch in 2000, EWT has a considerable asset base, some $3.75 billion, and high volume for an MSCI Index ETF. This makes it unique among Taiwan ETFs, and it remains the only stable Taiwan play going into 2016. EWT is managed by BlackRock Fund Advisors.

The fund is not a perfect track for the Taiwan stock market, however, since it excludes the bottom 15% of firms in terms of market capitalization.

EWT makes annual distributions and its benchmark undertakes quarterly rebalancing. The management fee of 0.62% as of 2015 is considered average for the fund category, if not a little high for indexed ETFs overall.

The ETF is also denominated in dollars, meaning it does not possess a currency exchange adjustment. This can play for or against an American investor based on the exchange rate between the U.S. dollar and the New Taiwan dollar.

Suitability and Recommendations

iShares MSCI Taiwan ETF tracks an index composed of foreign stocks, so it is particularly vulnerable to currency risk, market risk and regulatory risks; it has to deal with securities regulations in the United States and business regulations in Taiwan. Like all MSCI-based ETFs, EWT can be a nice hedge against American stock market fluctuations, but it is highly correlated with the ebbs and flows of the Taiwanese stock market.

Geopolitical tensions create a link between Taiwanese stocks and news out of China. Investors who hold or are interested in EWT should take care to watch political and economic rumblings out of China and, to a lesser extent, Japan.

EWT's modern portfolio measurables are favorable for buy-and-hold investors. As of mid-2015, the fund has a trailing three-year alpha of 7.75 and a trailing beta of 0.69. This suggests the fund is well-managed and lacks wide-spread correlation with average market volatility. The standard deviation of 11.05 is within a standard range for the fund category, and the Sharpe Ratio is a reasonable 1.04. Market analysts like the fund overall; Morningstar rates the five-year returns as "above average" and its risk as "below average."

Even though the beta for EWT is moderately low, EWT is still a 99% weighted-equity fund. It is prone to losing big when recessions hit and should not form the core of an investor's portfolio without significant diversification away from stock market risks.

This fund is best served as a satellite holding to a more broadly exposed equity portfolio. Investors are recommended to find a way to diversify away from such enormous technology weighting and add some nonequity assets over time. American investors who hold primarily North American or European stocks will likely find value in iShares MSCI Taiwan.