Investors are funding 85% of dividends at one Taiwan ETF

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One of Taiwan’s most popular high-dividend exchange traded funds has announced that 85 per cent of its monthly payout in November was taken from investor capital rather than corporate dividends or capital gains.

The disclosure follows the introduction of new rules earlier this month by the Financial Supervisory Commission requiring fund houses to start disclosing the dividend composition of ETFs.

The move was announced in September after the FSC received complaints that the proportion of dividends paid out via a “earnings equalisation mechanism” was too high.

There are now 23 ETFs in Taiwan that use the mechanism, through which a proportion of new money invested in the ETF is used to top up regular payments to investors to prevent large subscriptions from diluting payouts.

Fund firms in Taiwan declare ETF dividends a week before the payment is dished out, which often causes a rush of investors into those products that offer the highest upcoming payouts.

The Fuh Hwa Taiwan Technology Dividend Highlight ETF, one of the most popular ETFs listed in Taiwan this year, disclosed last week that 85.7 per cent of its monthly payout had come from the equalisation mechanism, while only 14.3 per cent came from actual dividends.

The proportion accounted for by the earnings equalisation mechanism is far higher than for any other ETF providers that have so far disclosed their ETF dividend composition.

So far just three other firms have announced this figure, paying out 10 per cent or less of dividends this month using investor capital via the earnings equalisation mechanism, according to the announcements on the Taiwan Stock Exchange’s ETFortune platform.

Xav Feng, Taipei-based director of Lipper Asia Pacific Research, said that the extremely rapid growth of the Fuh Hwa ETF had led to the high figure.

In October, more than 20,000 investors rushed into the ETF in the week before its ex-dividend date, or the date at which new subscribers were not eligible to receive dividends, to receive the payout, according to data from the Taiwan Depository and Clearing Corporation.

But Feng said that Taiwanese investors would not be deterred by the disclosure that such a large proportion of the dividend was derived from investors’ capital.

“I don’t think it will be too much of a negative factor,” he said. “Investors are buying this ETF mainly because they value monthly payouts and its performance.”

The Fuh Hwa Taiwan Technology Dividend Highlight ETF was launched in June but has already become the third-largest equities high dividend ETF. It is also the first in Taiwan to offer monthly payouts.

It became just the fourth local ETF to reach the NT$100bn ($3.14bn) in assets, a milestone that it hit within its first 150 days. It was managing NT$102.24bn on November 15, according to the manager’s website.

The ETF dished out dividends for the first time in July, offering NT$0.11 per unit, which is a monthly dividend rate of 0.67 per cent. Dividends from investee companies accounted for 47.7 per cent of the July payout.

However, as more investors piled into the ETF, coupled with fewer Taiwan-listed companies paying out dividends, the proportion of corporate dividends in the payout gradually declined to just 14.3 per cent in November, even though the payout to investors amount remained stable.

The shortfall in the ETF dividend payout was subsidised by investor capital using the earnings equalisation mechanism.

Following the success of the Fuh Hwa Taiwan Technology Dividend Highlight ETF, other fund houses have followed suit and launched more high-dividend ETFs with monthly payouts.

Investors have complained to the FSC that the mechanism is being used to portion off additional capital to help artificially increase dividend payouts to attract investors.

In August, Kao Ching-ping, deputy director of the FSC’s Securities and Futures Bureau, said the regulator would like ETFs to go “back to basics”, and that dividend payouts should be based on the dividends and bond yield instead of paying by earnings equalisation mechanism.

Lipper’s Feng points out that the new disclosure rule can help investors who are concerned about the overuse of the earnings equalisation mechanism to filter out these products.

“However, they will have to accept the fact that dividend payout without such a mechanism may fluctuate,” he noted.

“There is a Chinese proverb — you can’t expect a horse to run fast without feeding it,” he says. “It is very unlikely to have dividend income every month for monthly or quarterly payouts.”

Taiwan investors have demonstrated an unswerving appetite for high-dividend ETFs. The 17 Taiwan equities high-dividend ETFs had total assets of NT$745.3bn by November 10, more than double the amount they held at the beginning of this year, according to data from ETFortune.

*Ignites Asia is a news service published by FT Specialist for professionals working in the asset management industry. Trials and subscriptions are available at ignitesasia.com.