EWT - EWT: High Concentration But A Reasonable Valuation With Momentum

2023-12-18 00:31:10 ET

Summary

• Global equities, including US small and mid-cap stocks, have participated in the 2023 rally.
• The iShares MSCI Taiwan ETF is an outperforming EM country fund with a reasonable valuation and improved momentum.
• EWT has a high share price and a trailing 12-month dividend yield of 15.1%, but dividends are expected to normalize at a lower rate.
• I highlight key price levels to watch on the chart as we approach 2024.

The rally off the October lows has been broad-based. It’s not just US small and mid-cap stocks joining the 2023 rally party, either. Global equities have taken part, helped by a US Dollar Index that has cratered from near 107 to under 102 as we look to close out the year. Among the outperforming country funds is the iShares MSCI Taiwan ETF (EWT).

I have a buy rating on the fund given its reasonable valuation and improved momentum as we head into 2024.

YTD ETF Performance Heat Map

According to the issuer, EWT seeks to track the investment results of an index composed of Taiwanese equities. The fund invests in large and mid-sized companies, offering investors targeted access to the Taiwanese stock market. The fund seeks to track the performance of the MSCI Taiwan 25/50 Index, by using a representative sampling technique.

EWT is a decent-sized fund with more than $3.6 billion in assets under management and it pays a high 15.1% trailing 12-month dividend yield, as of December 14, 2023. I dug deeper and found that the ETF had historically paid an annual dividend of around $1, but that increased to $1.76 in 2021 and shot up to $7.56 in 2022 thanks to a large $7.56 payout in December last year. I would expect dividends to normalize at a lower rate, so don’t expect the current double-digit yield to persist.

Impressive at the moment is EWT’s high share-price momentum – a key factor leading to the ETF being ranked number one out of 29 in its ETF Sub Class . What’s not so appealing to investors is an expense ratio that is a bit on the high side for an index product at 0.58% and the fund’s Risk rating is extremely poor thanks to a high short interest and standard deviation. Tracking error, per Seeking Alpha, has also been weak – a key risk to monitor. Still, the fund is highly liquid with more than 2.4 million shares traded daily and a 30-day median bid/ask spread of just two basis points. Of course, a key risk is if China invades Taiwan - a significant decline in EWT's share price could take place if that macro event took place.

Digging into the portfolio, the 5-star, gold-rated fund by Morningstar illustrates that EWT is highly concentrated in large-cap blend and large-cap value. Just 7% of the allocation is outside of those two parts of the style box. With a price-to-earnings ratio slightly above 15 and respectable long-term earnings growth, the portfolio is somewhat appealing from a valuation standpoint.

EWT: Portfolio & Factor Profiles

Perhaps the biggest allocation risk with EWT is its 22% weight in Taiwan Semiconductor. The rest of the portfolio is a bit more balanced, but there is still a high 62% weight in the Information Technology sector. Financials comprise 18% of the fund, and all other sectors have very little weight.

EWT: Portfolio & Dividend Information

Seasonally, we tend to see Taiwanese equities surge into the end of the year, at least in EWT’s last 20 years, according to data from Equity Clock . The fund sports gains, on average, in the first quarter, but volatility can kick up at times to begin the new year. Overall, EWT has performed well compared to other EM country funds in the last two decades.

EWT: Bullish Year-End Seasonal Trends

The Technical Take

With a reasonable valuation and high concentration, the chart suggests upside is quite possible looking ahead over the next several months. Notice in the chart below that shares were mired in a steep downtrend throughout 2022. A low under $40 was notched about a year ago, and the ETF has performed well compared to the broad emerging market index. A downtrend resistance line was broken just recently as the long-term 200-day moving average has turned positive in its slope. What’s more, the RSI momentum oscillator at the top of the graph is in bullish territory after pulling back earlier this month.

Also take a look at the high amount of volume by price on the left side of the chart – that should offer buying support on EWT pullbacks. Finally, there is a bit of an air pocket, with few shares traded, up to $57, where I see next resistance. Thus, I see that price point being in play over the quarters to come.

Overall, the chart is encouraging, and relative strength in 2023 helps support the momentum case heading into the new year.

EWT: Bullish Upside Breakout, Eyeing $57

The Bottom Line

I have a buy rating on EWT. While its portfolio is quite concentrated and there are sketchy risk metrics, the valuation is generally favorable while the chart offers hope for the bulls.

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