TSM, by the way, is the largest holding in EWT, making up about 20 percent of the portfolio, according to data compiled by ETF.com Analytics. The tech company is also the No. 2 holding in the broad-based EEM, with a 2.4 percent weighting.
The tech sector meanwhile takes up more than half of the EWT portfolio and 17.5 percent of EEM’s.
“The Taiwanese equity Index is dominated by the tech sector, and we believe this is a very good environment to own the technology sector globally, as you have growth recovering a bit here in the U.S. and also in other parts of the world,” Glovista’s Bhatt said.
Growing Trade With China
Growing trade with China also undergirds the Taiwan-focused investment thesis.
According to the Central Intelligence Agency’s “Factbook,” China overtook the U.S. as the No. 2 source of imports back in 2006 behind Japan, and China is now the No. 1 source of foreign direct investment. Going the other way, Taiwan is also loosening restrictions on Chinese investment in Taiwan.
“For a whole host of reasons, Taiwan continues to be positive,” said Bhatt, whose firm is currently adding to its Taiwan holdings.
All this is serious progress considering the underlying tension that has existed between the two countries since the People’s Republic of China was formed in 1949.
Mainland China has long coveted Taiwan as a lost province of the PRC, and Taiwan has become something of an unofficial protectorate of the U.S., even as its economy has flourished and its internal politics become more stable in the past 65 years.
But China-Taiwan economic ties—as well as the expansion of free-trade agreements in the region, with New Zealand, for example—may well hold the key to obviating what many analysts consider to be a potentially volatile geopolitical crisis in the making.
Still, the CIA noted that the Achilles’ heel of Taiwan’s economy may well be its heavy reliance on exports from the tech sector as well as machinery and petrochemicals.
“This heavy dependence on exports exposes the economy to fluctuations in world demand,” the CIA warned.
The agency also expressed concern about the longer-term economic effects of a rapidly aging population and a birth rate: “Taiwan's diplomatic isolation, low birth rate, and rapidly aging population are other major long-term challenges.”