The Franklin FTSE Taiwan ETF (NYSEARCA:FLTW) tracks the FTSE Taiwan Capped Index and offers investors exposure to Taiwanese mid and large-capped equities. The fund offers indirect exposure to technologies that are enabling the ascent of AI. Despite the positive performance, the fund still remains exposed to high levels of geopolitical risk, as China continues to double-down on military exercises to communicate their desire to reclaim the self-ruled island one day. Despite the complexity in the region, FLTW is cheap for such a tech-focused ETF, and I like its prospects for the time being.
Tech supply chain mastery amidst roiling regional tensions
Taiwan’s impressive economic growth over the past decades has been fueled by concentrated expertise in high-tech manufacturing. Notably, during the pandemic, Taiwan’s GDP grew on exports offsetting weakness in domestic demand. The economy is expected to expand to 1.61% in 2023, and is projected to expand further to 3.3% in 2024.
Taiwan is involved in a longstanding diplomatic dispute with China, since establishing independence in 1996 when it held its first elections. However, China sees Taiwan as a break-away province that will one day fall back under Chinese rule. Beijing has grown increasingly aggressive in moves to assert sovereignty over the self-ruled island.
The US does not formally recognize Taiwan; however, they have a strong trade relationship. The US is Taiwan’s second-largest trading partner, while China is its largest. The US is also the largest arms supplier for the country, which has accelerated recently, a reflection of the increasing tensions between Taiwan and China. It remains unclear what the US response would be in the event of a blockade or an invasion, but it would likely have an extreme impact on the performance of FLTW.
FLTW is predominantly a diversified tech exposure
Established in 2017, FLTW tracks the FTSE Taiwan Capped Index, with $225M in assets, and 125 individual holdings. The fund is heavily concentrated from a sector perspective, with 66% of the fund invested in tech. Additionally, 17% of the fund is allocated to financials.
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The fund is less concentrated from a single stock perspective. The top 10 securities account for 46% of assets. The largest single allocation (~20%) is to Taiwan Semiconductor Manufacturing Company Limited (TSM). This is the world’s largest contract chipmaker, with key customers such as Apple (AAPL) and NVIDIA (NVDA). TSM has benefitted enormously from fever-pitch interest and investment in the AI supply chain. The company reported a 16.5% increase in revenue last week, and it is the largest publicly traded company in Asia, with a market cap greater than $660B. Beyond TSM, there are no other outsized allocations to single names.
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Flows
FLTW has seen consistent inflows since 2021. The fund saw inflows in the immediate aftermath of COVID, where demand for remote work equipment skyrocketed. Increased inflows in 2023 likely reflect the accelerated interest in AI capabilities, of which semiconductors will be a crucial component.
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Risk and return profile
FTLW has delivered a total return of 68% over the 5-year period. We can see from the chart below that the fund is quite directionally correlated with both the S&P 500 (SPY) and the MSCI World (URTH). FTLW’s performance relative to the broader US market is impressive. This chart is interesting because it shows how tech driven the US market has been in the recent period. It also indirectly shows how a downturn in the tech sector could negatively impact demand for hardware manufactured in Taiwan, thus negatively impacting FLTW.
The fund displays an elevated risk profile relative to both US and global stocks, which is to be expected given the level of concentration in the fund. We actually see that the fund displayed lower volatility in the immediate aftermath of the COVID period, where volatility spiked for US and global stocks. FTLW has experience higher volatility more recently.
Cheap tech on a relative basis
FTLW is not cheap from a single country ETF perspective, particularly with respect to earnings. Its P/B ratio is 2.2x, while it is currently trading at 20.7x earnings. However, if you look at FLTW’s value compared to both the US and other tech-oriented ETFs, it does have some value to offer. For example, SPY is currently trading at 4.4x its book value and 21.5x earnings. The popular tech ETF Invesco QQQ (QQQ) is currently at a whopping 16.2x its book price, and 34.4x earnings. These are, of course, not apples-to-apples comparisons, however there is a broader tech concentration that runs through all three of these ETFs.
Closing Thoughts
FLTW tracks Taiwanese mid and large-cap equities, offering exposure to critical technologies enabling AI’s ascent, among other things. Taiwan’s economy is driven by high-tech manufacturing, but faces geopolitical risks from China’s claims over the self-ruled island. Despite volatility from regional tensions, FLTW has performed well over the last 5 years and trades at a discount to some U.S. tech ETFs on price-to-earnings and price-to-book valuations. It feels too early to bet against this fund based on geopolitical rhetoric, and FLTW is vulnerable if tech dominance in the US were to undergo a strong correction. However, given the projected sustained demand for tech-manufacturing regardless of inflated market values, I think FLTW is a solid buy for now.
