Regulatory pressure on Taiwanese fund firms to disclose how much capital is being used to make payouts from high-dividend exchange-traded funds is unlikely to dent investor enthusiasm for the increasingly popular products, experts say.
Last month, Taiwan’s regulator announced that from November 1, firms must disclose the dividend composition of ETFs as part of a crackdown on “earnings equalisation mechanisms” used to stop dividend payments being diluted by large subscriptions prior to the payout date.
However, fund firms are now facing scrutiny from the Financial Supervisory Commission with complaints that the mechanism is being used to portion off additional capital to help artificially increase dividend payouts to attract investors.
But Chu Yueh-Chung, assistant professor of the department of finance of Southern Taiwan University of Science and Technology, does not believe the new regulatory transparency will have an impact on the growing appetite for high-dividend ETFs in the market.
“Taiwanese investors will be attracted to an ETF as long as it boasts a high dividend payout, they don’t really care how fund houses can pay higher and higher dividends,” Chu tells Ignites Asia.
“And if fund houses still offer dividend payout as a gimmick, there will still be endless inflows into their ETFs,” Chu adds.
This year, Taiwanese investors have piled NT$93.12 billion (US$2.89 billion) into high dividend ETFs in the market attracted by promotions from some fund firms and in local media publications advertising dividend payouts as high as 10% or even 13% per annum.
Just over the past week, investors have added around NT$3.8 billion into two popular products, the Yuanta Taiwan Dividend Plus ETF and the Fuh Hwa Taiwan Technology Dividend Highlight ETF, ahead of the ex-dividend date for both ETFs.
Capital Fund’s Taiwan Select High Dividend ETF, which mostly recently handed out a 2.45% quarterly payout, was quoted by the media as providing a 10.5% annualised dividend rate.
Chu, who is critical of these abnormally high-dividend payouts, says that in fact investors can easily calculate how much money is being out of the ETFs in the form of regular income payments by looking at the index it tracks and its constituent stocks.
“How is it possible to pay out dividend higher than it should? There are obviously some problems,” Chu questions.
There are currently 16 Taiwan equities high-dividend ETFs, with total assets of NT$704.96 billion by October 13, according to data from the Taiwan Stock Exchange’s ETFortune platform. Twelve of these have been launched in or after 2020 as their popularity has grown.
But there are also 146 ETFs in Taiwan offering income distributions, 23 of which have adopted the so-called earnings equalisation mechanism, according to the FSC.
“The regulator needs go back to the root of the problem – fund houses can pay excessive ETF dividends because they investors more than necessary through the earnings equalisation mechanism,” Chu says.
“The FSC should come up with a reasonable formula for the amount of money that fund houses can charge for the earnings equalisation mechanism. Only then will it be impossible for fund houses to pay excessive ETF dividends,” he adds.
Part of the issue is that high-dividend ETFs started off distributing dividends annually, then quarterly, every other month and ultimately monthly.
However, Taiwanese companies are only allowed to pay dividends on a quarterly basis, and most only do so on an annual basis, meaning there are often many months when fund houses do not receive any dividends from their Taiwan equities ETF.
The first Taiwan equities high-dividend ETF with monthly payouts, the Fuh Hwa Taiwan Technology Dividend Highlight ETF, was only launched in June but has already become the third largest by assets among its type, managing NT$88.33 billion by October 13, according to the firm’s website.
But many in the industry criticise the common way profits from high-dividend ETFs have been presented to investors, by fund firms and especially through media reports that often over-emphasise on
increasing payout ratio.
Fuh Hwa Securities Investment Trust’s official website only displays the ETF’s annualised dividend rate of 7.67%, rather than its most recent monthly dividend payout of 0.63%. Local media then quoted the annualised dividend rate in their articles.
Chu criticises this use of firms and media for focusing on the annualised dividend figure as it is "too crude a method" for representing income payouts.
Liu Tsung Sheng, chairman of the Securities Investment Trust and Consulting Association, tells Ignites Asia that many advertisements have started to “overly promote” the ability of high-dividend ETFs to create or increase the dividend payout capacity.
The Yuanta Taiwan Dividend Plus ETF is the first and largest such strategy with NT$227 billion in assets by August and close to one million beneficiaries.
The ETF, launched in 2007, has this year switched from annual to quarterly distributions this year, but with media highlighting its annualised payout ratio of 13%.
GooHappy (股添樂), a popular investment-oriented influencer with more than 80,000 followers on Facebook, also criticised on such a calculation of high-dividend ETFs’ annualised payout ratio.
He pointed out that profit of these ETFs should be presented in terms of annual dividend yield instead of annualised payout ratio, which is 6.2% and 13% respectively for the Yuanta Taiwan Dividend Plus ETF.
For high-dividend ETFs, the annualised payout ratio is the percentage of dividends that investors receive from investments, while annual dividend yield is the actual rate of return at the share price of the ETF.
“[Such an annual dividend yield] should be considered a moderate performance for high-dividend ETFs,” he says.
Two more Taiwan equities high-dividend ETFs that started fundraising on Monday will also be paying out dividends monthly. This increased the number of similar products issued this year to four.
The CTBC Investments Growth High Dividend ETF and Taishin Securities Investment Trust’s Taishin Continuous High Dividend ETF announced that they will not include earnings equalisation mechanisms for now.
Southern Taiwan University of Science and Technology’s Chu worries that the launch of more Taiwanese equities high-dividend ETFs with even higher payouts will not be good for market development.
“As long as the fund houses see that there is a market for this product, other companies will definitely follow and there is no way around it,” he says. “In the end, bad money will drive out good.”
“Taiwan’s ETF issuers had overplayed their hands, the market’s recent development has really gone off the rails,” Chu says.
“It may only take two or three more years for the Taiwan ETF market to become a bubble,” he adds.
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