Nelson Huang
Carrie Ho
In this insight we introduce a multi-asset index featuring a high-income strategy, which could serve as a benchmark for new multi-asset ETFs in Taiwan. The index idea comes in response to a recent regulatory change: on 30 July 2024, Taiwan’s financial market regulator, the Financial Supervisory Commission (FSC), lifted a ban on fixed weight passive multi-asset ETFs[1].
- High Dividend ETFs: High dividend equity ETFs are highly popular among Taiwanese investors, offering stability and income during low-interest rate periods.
- Multi-Asset Strategy: A dynamic multi-asset strategy that includes both high-dividend equities and fixed-income instruments helps in diversifying risk while enhancing returns.
- Currency Exposure: Leveraging both USD and TWD assets allows Taiwanese investors to benefit from currency fluctuations and diversify currency risk.
In Taiwan, high-dividend equity ETFs have attracted significant assets. Compared to investment products focusing on long-term capital growth, high-dividend products offer a steady stream of income and can provide a sense of security for retail investors, especially during a low-interest rate market environment. According to the latest data from Taiwan Stock Exchange[2], 7 out of the top 10 equity ETFs in Taiwan feature a high-dividend strategy. In most other markets, ETFs based on capitalisation-weighted indices are the most common; however, in Taiwan, high-dividend ETFs have double the assets of market-weighted ETFs[3].
At the same time, fixed income instruments have also started to attract more interest in the Taiwan market. Especially after the Covid crisis, investors became more aware of the importance of asset allocation and risk management: in uncertain and volatile market conditions, it is preferable to have a portfolio that mitigates risk and offers diversified exposure to different asset types.
Prior to 2021, bonds offered very low yields, but this changed after the US Federal Reserve started raising its interest rates: the target Fed Funds rate is now 5.25-5.50%[4]. Rate rises have been mirrored in the bond markets: as at end-July 2024, the US Broad Investment Grade Bond Index’s (USBIG’s) yield to maturity is 4.67%, (see figure 1). This makes US bonds potentially attractive to Taiwanese investors, who are thirsty for yield.
Figure 1. FTSE US Broad Investment-Grade Bond Index (USBG) index profile
| Description | # of Issues | Par Amount* | Market Value* | Market Weight (%) | Average Coupon (%) | Average Life (Years) | Yield to Maturity | Effective Duration | OAS (bps) |
|---|---|---|---|---|---|---|---|---|---|
| USBIG | 9,846 | 29,828.10 | 27,605.49 | 100 | 3.34 | 8.96 | 4.67 | 6.03 | 39 |
| 1-3 Years | 1,955 | 6,209.21 | 6,085.53 | 22.04 | 3.01 | 1.95 | 4.54 | 1.83 | 18 |
| 3-7 Years | 2,929 | 8,953.67 | 8,605.10 | 31.17 | 3.35 | 4.87 | 4.43 | 4.13 | 35 |
| 7-10 Years | 1,442 | 8,599.26 | 7,811.09 | 28.3 | 3.29 | 8.47 | 4.81 | 6.2 | 45 |
| 10+ Years | 3,520 | 6,065.96 | 5,103.78 | 18.49 | 3.74 | 22.86 | 5 | 13.97 | 64 |
| US Treasury | 282 | 13,140.76 | 12,194.31 | 44.17 | 2.84 | 8.36 | 4.19 | 5.97 | -0 |
| Government Sponsored | 186 | 465.10 | 456.59 | 1.65 | 3.06 | 4.43 | 4.24 | 3.82 | 10 |
| Collateralised | 311 | 7,763.78 | 6,983.52 | 25.3 | 3.24 | 7.69 | 4.95 | 5.22 | 42 |
| Credit | 9,067 | 8,458.45 | 7,971.08 | 28.87 | 4.21 | 11.29 | 5.17 | 6.95 | 99 |
* In USD billions
Source: Factsheet | FTSE US Broad Investment-Grade Bond Index (USBIG®) | July 31, 2024. Please see the end for important legal disclosures.
Another factor driving Taiwanese investors’ interest in US dollar-denominated assets is the recent appreciation of the US dollar against the Taiwanese dollar (see figure 2—the US dollar has appreciated 18% against Taiwanese dollar in the last 3 years).
Figure 2. USD/TWD exchange rate
Source: LSEG Workspace, USD/TWD exchange rate from Aug 2021 to Aug 2024. Please see the disclaimers for important legal disclosures.
In our design of a multi-asset index for Taiwanese investors, we therefore include both US equity and US fixed-income indices, plus the local Taiwanese equity index, so that the combined portfolio will generate cashflows in both Taiwanese and US dollars. As bonds traditionally play a defensive role in the portfolio during any stock market turmoil, this multi-asset, multi-currency strategy could theoretically diversify both foreign exchange and asset class risk.
On the equity side, given that our investment objective is to target a high-income strategy, we include high-dividend indices from the US and Taiwan. And to allow for potential growth and diversity, we include the Russell 1000 index of US large-cap stocks, gaining broader market exposure and access to a wider universe.
In figure 3 we show the recent 3-month deposit rates in US and Taiwan dollars. The difference between US and Taiwan deposit rates reached 4% in late 2023 and has since dropped slightly to 3.5%. Because of this, US dollar-denominated bonds generate a more attractive yield than Taiwan-dollar denominated fixed income securities. Due to the current interest rate spread, we choose a US Treasury index and a US dollar corporate bond index for the multi-asset index. As is shown in figure 1, these two asset classes offered a yield to maturity of 4.19% and 5.17%, respectively, at the end of July 2024.
Figure 3. 3-month Deposit Rate in USD and TWD
Source: LSEG Workspace, 3 Month deposit rate of USD and TWD from Aug 2021 to Aug 2024. Please see the disclaimers for important legal disclosures.
Selection of Underlying Assets
To summarise, to tailor the multi-asset index to the needs of Taiwan investors, we selected five indices as building blocks.
Equity:
- The Russell 1000 Index: The Russell 1000 Index is a subset of the Russell 3000 Index, including approximately 1,000 of the largest companies in the US equity universe.
- FTSE US High Dividend: The FTSE US High Dividend Yield Index is designed to represent the performance of companies with relatively high forecast dividend yields within the universe of the FTSE US All Cap Index (excluding REITs).
- FTSE Taiwan High Dividend: The FTSE TWSE Taiwan Dividend+ Index is a tradeable dividend yield-weighted index which measures the performance of the 50 higher-yielding stocks within the universe of the FTSE TWSE Taiwan 50 and FTSE TWSE Taiwan Mid-Cap 100 Indices.
Fixed-Income:
- FTSE US Treasury: The FTSE US Treasury Index measures the performance of fixed-rate US government bonds.
- FTSE US Corporate: The FTSE US Corporate Index is a subset of the FTSE US Broad Investment-grade Bond Index (USBIG), which measures the performance of US corporate debt.
Historical Simulation and Results
From historical data on yield (dividends), we observe in Figure 4 that the Taiwan High Dividend index has generated the highest income for most of the 2016-2024 period. Reflecting the low level of dividend yields in the US equity market, the Russell 1000, has produced relatively low income. On the fixed income side, with US interest rates rising from 2022 in response to higher inflation, we see that the yield from fixed income assets has also picked up.
Multi-Asset Weight Allocation
To construct a multi-asset index with a yield focus, a simple and straightforward methodology is to use yield (dividend) as the key factor for asset allocation in a dynamic way. In the table, we compare two dynamic yield-weighted approaches with two other possible weighting schemes (fixed starting weight and fixed equal weight):
| Weight Scheme | Definition |
|---|---|
| Free Float | We start as equal weight (20%) among the five asset classes and then let them float freely afterwards. |
| Equal | We maintain a fixed equal weight (20%) at all times. |
| Yield Weight | We use yield (dividend) as the factor to allocate weights dynamically monthly. |
| Yield Weight with Floors | We use yield (dividend) as factor to allocate weights dynamically on monthly basis and include a weight floor such as 5/10/15% |
Historical Simulation and Results
From historical data on yield (dividends), we observe in Figure 4 that the Taiwan High Dividend index has generated the highest income for most of the 2016-2024 period. Reflecting the low level of dividend yields in the US equity market, the Russell 1000, has produced relatively low income. On the fixed income side, with US interest rates rising from 2022 in response to higher inflation, we see that the yield from fixed income assets has also picked up.
Figure 4. Average Yield by Year (Across Assets)
Source: FTSE Russell. Data from end of Dec 2015 to end of July 2024. Returns shown prior to index or rate launch reflect hypothetical historical performance. Please see the disclaimers for important legal disclosures.
Figure 5. Average Yield by Year (different multi-asset index weighting schemes)
Source: FTSE Russell. Data from end of Dec 2015 to end of July 2024. Returns shown prior to index or rate launch reflect hypothetical historical performance. Please see the disclaimers for important legal disclosures.
To compare the yield among the different multi-asset index approaches, we see in Figure 5 that if we use yield/dividend to drive asset allocation (i.e., without a floor on individual asset class weights), then we can achieve the highest possible yield. However, we may end up having a portfolio that is too skewed to a single asset class (see figure 6). So, sacrificing some level of yield to maintain a more balanced multi-asset basket can offer better diversification and reduce potential index volatility.
Figure 6. Historical allocation of unconstrained yield weighted approach
Source: FTSE Russell. Data from end of Jan 2007 to end of July 2024. Returns shown prior to index or rate launch reflect hypothetical historical performance. Please see the disclaimers for important legal disclosures.
In Figure 7 we compare the past risk and return outcomes for the component asset classes and the different multi-asset solutions. All simulated multi-asset strategies significantly improved the risk adjusted returns by comparison with single-asset strategies. In Figure 8, we show the same results from the perspective of a Taiwanese investor.
Among the multi-asset approaches, a pure equal-weight strategy produced the lowest past volatility. Adding a progressively higher floor to individual asset class weights has similar effects, as this produces more asset diversity.
In terms of return, the unconstrained yield weight approach outperforms all other multi-asset approaches (with an 8.72% annualized return in USD and 8.77% annualised return in TWD). Historically, the unconstrained yield-weight approach overweights the Taiwan High Dividend index (see figure 4), which has shown consistently robust performance, in turn contributing to the overall return of the yield-weighted multi-asset index. Combined with the effect of reduced volatility, this leads to the improvement of the risk-adjusted return.
Figure 7. Risk and Return Comparison in USD
| Equity | Fixed-Income | Multi-Asset | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Annualised Return (%) | R1,000 | USHD | TWHD | UST (US Treasury) | US Corp | Free Float | Equal | Yield Weight | 5% Floor | 10% Floor | 15% Floor |
| YTD (Year to Date) | 15.9 | 12.97 | 2.42 | 1.34 | 2.03 | 8.47 | 6.91 | 4.95 | 5.44 | 5.93 | 6.42 |
| 3 years | 8.52 | 9.08 | 8.98 | -2.95 | -2.64 | 6.01 | 4.47 | 4.78 | 4.71 | 4.64 | 4.56 |
| 5 years | 14.59 | 10.67 | 14.96 | -0.19 | 1.11 | 9.97 | 8.53 | 10.31 | 9.87 | 9.43 | 8.98 |
| 10 years | 12.86 | 10.13 | 10.44 | 1.14 | 2.64 | 8.48 | 7.73 | 8.85 | 8.58 | 8.3 | 8.02 |
| Inception (2007) | 10.15 | 8.5 | 9.14 | 2.63 | 4.28 | 7.56 | 7.41 | 8.72 | 8.4 | 8.08 | 7.75 |
| Equity | Fixed-Income | Multi-Asset | |||||||||
| Annualised Vol (%) | R1,000 | USHD | TWHD | UST | US Corp | Free Float | Equal | Yield Weight | 5% Floor | 10% Floor | 15% Floor |
| YTD (Year to Date) | 10.28 | 10.17 | 13.93 | 5.01 | 5.6 | 8.37 | 7.09 | 6.45 | 6.61 | 6.76 | 6.93 |
| 3 years | 17.74 | 15.61 | 21.95 | 6.32 | 9.08 | 13.95 | 12.31 | 13 | 12.78 | 12.58 | 12.43 |
| 5 years | 18.32 | 16.8 | 20.53 | 5.82 | 8.79 | 13.31 | 11.82 | 13.37 | 12.93 | 12.52 | 12.15 |
| 10 years | 15.5 | 14.19 | 17.87 | 4.76 | 6.82 | 10.82 | 9.71 | 11.12 | 10.72 | 10.35 | 10.01 |
| Inception (2007) | 16.02 | 14.96 | 20.8 | 4.64 | 6.64 | 10.42 | 10.09 | 11.93 | 11.42 | 10.94 | 10.5 |
| Equity | Fixed-Income | Multi-Asset | |||||||||
| Ret / Vol | R1,000 | USHD | TWHD | UST | US Corp | Free Float | Equal | Yield Weight | 5% Floor | 10% Floor | 15% Floor |
| YTD (Year to Date) | 1.55 | 1.27 | 0.17 | 0.27 | 0.36 | 1.01 | 0.97 | 0.77 | 0.82 | 0.88 | 0.93 |
| 3 years | 0.48 | 0.58 | 0.41 | -0.47 | -0.29 | 0.43 | 0.36 | 0.37 | 0.37 | 0.37 | 0.37 |
| 5 years | 0.8 | 0.64 | 0.73 | -0.03 | 0.13 | 0.75 | 0.72 | 0.77 | 0.76 | 0.75 | 0.74 |
| 10 years | 0.83 | 0.71 | 0.58 | 0.24 | 0.39 | 0.78 | 0.8 | 0.8 | 0.8 | 0.8 | 0.8 |
| Inception (2007) | 0.63 | 0.57 | 0.44 | 0.57 | 0.65 | 0.73 | 0.73 | 0.73 | 0.74 | 0.74 | 0.74 |
Source: FTSE Russell. Data from end of Dec 2007 to end of July 2024. All figures are in USD. Please see the disclaimers for important legal disclosures.
Figure 8. Risk and Return Comparison in TWD
| Equity | Fixed-Income | Multi-Asset | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Annualised Return (%) | R1,000 | USHD | TWHD | UST | US Corp | Free Float | Equal | Yield Weight | 5% Floor | 10% Floor | 15% Floor |
| YTD (Year to Date) | 24.13 | 20.99 | 9.7 | 8.53 | 9.27 | 16.18 | 14.5 | 12.41 | 12.93 | 13.45 | 13.97 |
| 3 years | 14.53 | 15.11 | 15.01 | 2.42 | 2.75 | 11.87 | 10.25 | 10.58 | 10.51 | 10.43 | 10.34 |
| 5 years | 15.87 | 11.91 | 16.25 | 0.93 | 2.24 | 11.2 | 9.74 | 11.54 | 11.1 | 10.65 | 10.2 |
| 10 years | 13.9 | 11.15 | 11.46 | 2.07 | 3.59 | 9.48 | 8.73 | 9.85 | 9.58 | 9.3 | 9.02 |
| Inception (2007) | 10.21 | 8.56 | 9.19 | 2.68 | 4.33 | 7.61 | 7.47 | 8.77 | 8.45 | 8.13 | 7.8 |
| Equity | Fixed-Income | Multi-Asset | |||||||||
| Annualised Vol (%) | R1,000 | USHD | TWHD | UST | US Corp | Free Float | Equal | Yield Weight | 5% Floor | 10% Floor | 15% Floor |
| YTD (Year to Date) | 8.96 | 10.14 | 12.21 | 4.42 | 5.15 | 6.93 | 5.75 | 5.09 | 5.24 | 5.41 | 5.58 |
| 3 years | 15.57 | 14.08 | 18.22 | 4.37 | 5.73 | 10.91 | 9.1 | 9.25 | 9.14 | 9.07 | 9.06 |
| 5 years | 16.9 | 15.97 | 17.6 | 5.46 | 7.03 | 11.3 | 9.75 | 10.93 | 10.56 | 10.24 | 9.97 |
| 10 years | 14.17 | 13.27 | 15.2 | 5.53 | 6.07 | 9.07 | 7.93 | 8.92 | 8.61 | 8.34 | 8.11 |
| Inception (2007) | 14.37 | 13.64 | 18.04 | 6.21 | 6.51 | 8.52 | 8.09 | 9.51 | 9.08 | 8.7 | 8.36 |
| Equity | Fixed-Income | Multi-Asset | |||||||||
| Ret / Vol | R1,000 | USHD | TWHD | UST | US Corp | Free Float | Equal | Yield Weight | 5% Floor | 10% Floor | 15% Floor |
| YTD (Year to Date) | 2.69 | 2.07 | 0.79 | 1.93 | 1.8 | 2.33 | 2.52 | 2.44 | 2.47 | 2.49 | 2.51 |
| 3 years | 0.93 | 1.07 | 0.82 | 0.55 | 0.48 | 1.09 | 1.13 | 1.14 | 1.15 | 1.15 | 1.14 |
| 5 years | 0.94 | 0.75 | 0.92 | 0.17 | 0.32 | 0.99 | 1 | 1.06 | 1.05 | 1.04 | 1.02 |
| 10 years | 0.98 | 0.84 | 0.75 | 0.37 | 0.59 | 1.04 | 1.1 | 1.1 | 1.11 | 1.12 | 1.11 |
| Inception (2007) | 0.71 | 0.63 | 0.51 | 0.43 | 0.67 | 0.89 | 0.92 | 0.92 | 0.93 | 0.93 | 0.93 |
Source: FTSE Russell. Data from end of Dec 2007 to end of July 2024. All figures are in USD. Please see the disclaimers for important legal disclosures.
Summary
The Taiwan FSC’s recent greenlighting of multi-asset ETFs is likely to incentivise future ETF issuance. FTSE Russell has the capabilities to provide multi-asset index solutions for Taiwan’s unique market, emphasising a yield-weighted high-income approach.
In this blog, we have selected five underlying asset classes from US and Taiwan, capturing potential dividends and growth and offering portfolio cashflows in both USD and TWD. While the strategy focuses on high income, the choice of indices also ensures broad market exposure and diversification.
In the article, we examined the historical results of different multi-asset solutions using these five building blocks. In terms of risk and performance, every multi-asset approach delivered better risk-adjusted returns than the individual asset classes.
As for the yield-weighted asset allocation approach, we can achieve the highest possible simulated return if we use yield as the direct factor to adjust weight allocation between assets, despite higher volatility.
Incorporating floors into the asset class weights added constraints and therefore weakened the yield potential but ensured better risk protection through higher diversification. These floors (and caps) also help passive investors to reduce their transaction costs. Another way to reduce the multi-asset index turnover is change the frequency of asset reallocation from monthly to quarterly. Ultimately, the choice of index design comes down to investors’ risk appetite and investment objectives.
It’s worth stressing that choosing different base indices may lead to completely different results. As an extension of our multi-asset approach, it may be worth exploring other blends of local currency stocks with bond markets, or even blends of stocks with convertible bonds, cryptocurrencies, and commodities.
1. 新聞稿-主動式ETF正式開跑，多資產ETF聯手出擊-金融監督管理委員會全球資訊網 (fsc.gov.tw)
2. 臺灣證券交易所｜ETF e添富 (twse.com.tw)
3.. Why Taiwan ETFs Are Breaking Records｜Industry｜2024-04-03｜CommonWealth Magazine Vol.795 (cw.com.tw)
4. Federal Funds Effective Rate (FEDFUNDS) | FRED | St. Louis Fed (stlouisfed.org)
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