Learning from South Korea! FSC: Taiwan Bans 'Single-Stock Leveraged ETFs' – Stock Market Concentration Remains Healthy

South Korea's stock market has recently experienced sharp surges and crashes, prompting regulators to suspend the listing of new single-stock leveraged ETFs to curb extreme volatility. In response, Taiwan's Financial Supervisory Commission (FSC) stated that current regulations impose strict diversification requirements—such as a 30% cap on individual stock weight—meaning such products are neither permitted nor under consideration for approval in Taiwan. As of the second quarter of this year, domestic ETFs hold NT$6.8 trillion in listed and OTC stocks, representing 4.2% of the total market capitalization. This marks a slight increase from 3.9% in the previous quarter but remains within a healthy range and is significantly lower than levels seen in international markets. The regulator will continue ongoing monitoring.

South Korea’s financial regulator recently announced a temporary halt on new single-stock leveraged ETFs, aiming to suppress market volatility driven by excessive tracking of large-cap stocks like Samsung Electronics and SK Hynix. In response, Huang Chung-hao, Deputy Director of the Securities and Futures Bureau, stated during the FSC’s regular briefing that Taiwan enforces a strict 'diversification principle' to ensure capital market soundness and financial stability. Current regulations do not support, nor are there plans to introduce, highly volatile single-company leveraged products.

Huang explained that Taiwan’s ETF and fund regulations place strong emphasis on 'risk diversification.' A single stock’s weight within an ETF cannot exceed 30%, and the combined weight of the top five holdings must not surpass 60%. Under these rules, an ETF cannot consist of just one stock, as it would fundamentally violate the core concept of ETFs as diversified 'baskets of stocks.'

Addressing market concerns about excessive concentration in a few large-cap stocks, Huang noted that such concentration is a 'natural outcome of economic development' seen in markets like South Korea and Hong Kong. The FSC has established a regular monitoring mechanism to track this trend.

As of the end of Q2 this year, the total market capitalization of listed and OTC stocks in Taiwan reached NT$162 trillion. Domestic ETFs hold NT$6.8 trillion worth of these stocks, accounting for 4.2% of the overall market. While this is a slight increase from Q1’s 3.9%, the rise is attributed to the growing number of ETFs and rising stock values.

Huang emphasized that despite the uptick, Taiwan’s 4.2% ETF ownership ratio remains significantly lower than international benchmarks—such as the U.S., where it reaches 20%—and is well within a healthy and acceptable range. Since implementing enhanced supervisory measures on April 30, 2024, the FSC has been closely monitoring the impact of ETFs on market and stock concentration.

To mitigate over-concentration in large-cap stocks, the FSC is actively pursuing multiple measures. These include promoting the 'Taiwan Puyu Index,' and in June 2024, launching two new indices: 'Puyu Small-Mid Cap' and 'Puyu High-Profitability.' These aim to provide asset managers with more diverse product options, guiding investor capital toward high-growth, high-quality small and mid-cap stocks to achieve better risk diversification. One financial institution has already expressed interest in developing a product based on the original Puyu Index.