Greater Export Numbers Prompt Citi to Upgrade Taiwan Outlook: Two ETFs to Play the Trend

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Includes: EWT, TWON
by: Tom Lydon

After a rocky start to 2010, Taiwan ETFs may soon start to feel better. For one, the country’s Taiwan’s economic outlook has been upgraded by Citibank as a result of the country’s strong export performance.

Citibank recently upgraded Taiwan’s economic growth forecast for 2010 from 5% to 7%, according to Focus Taiwan. Cheng Cheng Mount, chief economist at Citibank Taiwan, attributed the higher GDP projection to a recovery in domestic investments, greater government spending and global demand picking up. The government revised upward its 2010 GDP growth forecast from 4.72% to 6.14% after posting a 13.3% economic growth for the first quarter.

Last month, Taiwan posted a record-high export figure of $25.54 billion, or a 57.9% surge year-over-year. For the first five months of the year, exports tallied $109.26 billion, or up 52.7% year-over-year.

Fixed investments for 2010 are expected to jump 13.6% year-over-year. Local consumption is estimated to increase 2.2% from 2009. The 2010 unemployment rate is calculated to fall to 5.4% as manufacturing companies increase their workforce.

Investors may access the growth in Taiwan through iShares MSCI Taiwan Index (NYSEARCA:EWT) and the recently launched IQ Taiwan Small Cap ETF (TWON). The iShares EWT fund allocates 60% to technology, and the new small-cap IndexIQ ETF allocates 30% to tech, 27% to industrials and 18% to materials, with other sectors including smaller weightings, writes Roger Nusbaum for TheStreet. However, the small-cap ETF only allocates 11% to consumers, which leaves out a large segment of the market. TWON has 99 holdings, the largest of which have weightings of 1.8%.

Two risks that come with exposure to Taiwan include: Vulnerability to a worldwide economic slowdown – drop in demand for tech products would badly hurt the country. A volatile relationship with China – the two countries are still fighting over Taiwan’s state of independence.

Max Chen contributed to this article.

Disclosure: None