The Taiwan Monthly

Market & ETP Overview

Active ETFs and Passive Multi-Asset ETFs lead to a new investment era in Taiwan

On December 25, 2024, the Financial Supervisory Commission of Taiwan (the FSC) formally opened the active exchange-traded fund (Active ETF) and lifted the restrictions on passive index equity funds to include both stocks and bonds (Passive Multi-Asset ETF). This will further diversify the Taiwan ETF market to meet various investor needs and attract international asset management firms to enter the market.

Regulations on Active ETFs in Taiwan

Active ETFs are listed and traded on the stock exchange similar to current passive ETFs, but their investment strategies and proactive approaches are somewhat similar to those of active mutual funds. Unlike the passive ETFs, active ETFs allow fund managers to actively create, operate and adjust their investment portfolios based on their investment strategies in order to achieve more diversified investment objectives. For example, they may seek to exceed the benchmark or achieve specific investment objectives, which is very different from the current passive ETFs that replicate the performance of index tracking. Therefore, fund managers have more flexibility to manage them. Currently, the following are the highlights of the regulations issued by the financial regulator:

I.              Name: the name of active ETFs is “Active Exchange Traded Funds.”

II.            Scope: Given that it is the first time to introduce active ETFs in Taiwan, initially, active equity ETFs and active bond ETFs will be available and should be invested in accordance with the securities investment trust contract. An example of this would be an ETF that holds either equities or bonds, and the total amount invested in equities or bonds should reach 70% or more of the fund’s net asset value.

III.         Information Disclosure: The investment portfolio is disclosed completely. Like the current passive ETFs, the actual investment portfolio is disclosed on the asset management company’s website after the fund’s net asset value has been calculated every business day to protect the investors’ rights and interests. In addition, active ETFs in other countries are fully disclosed in general as per global trend. Investors should also be aware that the information of the fund’s portfolio will be announced after the net asset value of the fund is calculated every business day. However, given the active ETFs’ features, the fund manager may make portfolio adjustments on the following business day, so that the investment portfolio may not necessarily be the same as the one announced on the previous day.

IV.         Benchmarks: There is no mandatory requirement to have a benchmark. However, if a benchmark is adopted, the fund’s investment disclosure should include an explanation of the characteristics of the benchmark, differences between the ETF and the benchmark in terms of investment strategy and features, a comparison of the ETF’s performance with that of the benchmark, as well as definitions and calculation formulas. Additionally, the fund’s net asset value and the cumulative percentage change of the benchmark must be reported monthly on the Market Observation Post System(MOPS) as a reference for investors to assess the performance of actively managed ETFs.

V.           Trading Methods: Similar to passive ETFs, the trading methods include general trading, odd-lot trading and under DCA plan; after being listed, it can be used as the underlying of credit trading, SBL, and hedging transactions.

VI.         Identification: In order to enable investors to identify and differentiate the characteristics of the product, the TWSE has stipulated in the relevant regulations that the active equity ETFs will have "A" as the sixth code in the ticker, while active bond ETFs will use "D."

VII.      Prospectus: In addition to printing the name of the active ETF on the cover of the prospectus, the product features of the active ETF should be printed conspicuously.

VIII.    Applicable Regulations: Active ETFs investing in equities or bonds should be applied to the relevant regulations of equity funds and bond funds respectively. In addition, active ETFs may distribute the gains. In general, the distributable gains of active ETFs and matters like adopting the income equalization for dividend distribution are similar with the current passive ETFs.

Given that it is the first time to introduce active ETFs in Taiwan, the financial regulator has initially started with the active equity ETFs and active bond ETFs, and the investment portfolios have been made fully transparent. In the future, depending on the development of the new products issuance and the practical needs of issuers and investors, the TWSE will continue to cooperate with the financial regulator in discussing and adjusting the operating procedures or the direction of the active ETFs’ product opening.

Regulation of the Passive Multi-Asset ETFs in Taiwan

Multi-asset ETFs, like the current passive ETFs, are not only listed and traded on the stock exchanges, but also have the same regulations as the current passive ETFs. However, the index-tracking components consist of various assets, so that if investors want to make balanced allocations between stocks and bonds, they may be able to achieve risk diversification by using multi-asset ETFs. Currently, the following are the highlights of the regulations issued by the financial regulator:

I.                Scope: The underlying securities of the index must include both equities and bonds, and no leveraged or inverse ETFs can be issued using the aforementioned underlying indexes. Also known as a balanced ETF.

II.              Equity to debt ratio: The ratio of equity to debt is fixed based on a conditional basis. The rules for compiling the index should set fixed allocation ratios to equities and bonds, or set out indicative conditions (e.g. market analysis indicators) and the applicable allocation ratios to equities and bonds under each of the indicative conditions. The aforementioned criteria and allocation ratios should be based on examples drawn from overseas passive balanced ETF index compilation rules and should be reasonable.

III.           Product Identification: the last character of the stock code is "T".

IV.           Trading Methods: Similar to passive ETFs.

The passive ETF market for index tracking in Taiwan has been growing rapidly over the past few years. Investors are now familiar with ETFs whose index constituents are stocks or bonds. At present, the financial regulator may initially introduce balanced passive ETFs that include both equities and bonds as index constituents. Depending on the actual development situation, the TWSE will assist the financial regulator to gradually consider the introduction of other multi-asset ETFs.