Taiwanese Investors Face Significant Losses on US Bond ETFs Amidst Currency Appreciation

Taiwanese investors have recently faced considerable losses on their significant holdings of overseas assets, particularly those denominated in US dollars and focused on US bonds. A unique local investment landscape encouraged substantial capital flows into these foreign instruments, but recent shifts in currency valuations and bond market performance have led to significant financial pain for both large institutions and individual investors.

Taiwan boasts one of the world’s largest exchange-traded fund (ETF) industries relative to its economic size. As of late 2024, ETFs managed approximately $196 billion, representing 66% of all investment fund assets in the country, equating to roughly $8,400 per person. A substantial portion of these holdings is concentrated in bond ETFs.

This focus on foreign, dollar-denominated bonds was partly a response to earlier regulatory efforts. In 2018, regulators attempted to curb the boom in “Formosa bonds” – dollar bonds issued in Taiwan by overseas entities. The local financial industry circumvented these restrictions by developing “Formosa ETFs.” These were locally listed funds that primarily invested in dollar bonds, often US Treasuries or corporate debt. Because these ETFs were technically classified as domestic equity holdings, they avoided the ownership caps imposed on the underlying foreign bonds, opening a channel for both institutional and eventually retail investors seeking higher yields than available domestically.

Between 2019 and early 2024, Taiwanese investors poured an estimated $73 billion specifically into US bond ETFs, heavily favouring funds targeting long-term Treasury and corporate debt with maturities of 20 years or more. This influx was considerable, especially considering the entire Taiwanese fixed income ETF sector, including domestic holdings, was valued at about $94 billion in March.

The Impact of Market Shifts

Investor sentiment has recently shifted from enthusiasm to concern. Starting in February 2024, withdrawals from these funds began, accelerating significantly in subsequent months. While precise overall figures for May are still emerging, early data and market estimates suggest substantial losses.

These losses stem from a dual impact:

Firstly, the underlying US bonds have depreciated in value as the Federal Reserve raised interest rates.

Secondly, and more recently, the Taiwan dollar has appreciated significantly against the US dollar. This currency movement reduces the value of dollar-denominated assets when converted back into Taiwan dollars.

Economists had previously highlighted the Taiwan dollar’s significant undervaluation relative to the US dollar, notably through metrics like The Economist’s Big Mac Index, which earlier this year suggested an undervaluation nearing 60%. While this indicated potential for appreciation, many investors seemingly expected the currency to remain stable.

Quantifying the Losses and Outflows

Estimates from financial institutions in Taiwan suggest that the average investor holding US bond ETFs may have incurred losses around 11-12% in May alone, a combination of bond price declines and currency conversion losses.

A prime example is a major sector ETF, the Yuanta US Treasury 20+ Year Bond ETF. It experienced a roughly 13% decline in value since the beginning of April 2024, with a significant portion attributed to currency movements. Since its inception in early 2017, this fund is reportedly down nearly a third from its initial value when accounting for underlying bond losses from rising US interest rates.

Data on outflows confirms the trend:

Month (2024)	Estimated Net Outflows from Yuanta 20+ Year Treasury ETF
February	$192 million
March	$504 million
April	$817 million

Initial data for May suggests this acceleration is continuing. The total assets in this specific ETF had fallen to around $7.8 billion by late May, down from a peak of $9.4 billion at the end of April.

Despite recent losses and redemptions, the total assets held in Taiwanese US bond ETFs remain substantial, estimated at ten times their size from early 2019. This indicates that a significant amount of capital is still exposed, and continued outflows could have a notable impact.