How to Invest in Taiwan Stocks from the US
Learn accessible strategies for US investors to participate in Taiwan's stock market, unlocking new investment horizons.
Investing in Taiwan’s stock market from the United States offers an opportunity for portfolio diversification. While direct engagement with foreign exchanges can be complex, established avenues exist for US investors to access these markets. This article focuses on practical ways for US investors to gain exposure to Taiwan’s equities.
Establishing a Brokerage Account
Before engaging with international markets, establishing a suitable brokerage account is a necessary step. A brokerage account serves as the primary vehicle for buying, selling, and holding investments. Large online brokerage firms offer access to a broad range of investment vehicles, including those that provide exposure to international markets.
To open a brokerage account, individuals provide personal information like their name, address, date of birth, and Social Security Number. Financial details, including employment information, income, and investment objectives, are also required. The process involves linking a bank account for funding the investment account, typically through electronic or wire transfers.
Investing Through American Depositary Receipts
American Depositary Receipts (ADRs) offer a straightforward way for US investors to own shares of foreign companies without directly trading on overseas exchanges. An ADR is a certificate issued by a US depositary bank that represents a specified number of shares of a foreign company’s stock. These certificates trade on US stock exchanges, similar to domestic shares.
A primary benefit of ADRs is that they are denominated in US dollars and clear through US settlement systems, simplifying the investment process for American investors. To identify Taiwanese companies with available ADRs, investors can use their brokerage platform’s search functions or consult financial news websites. Major Taiwanese companies like Taiwan Semiconductor Manufacturing Company (TSMC), Chunghwa Telecom, and United Microelectronics Corporation have ADRs listed on US exchanges. Once an ADR is identified by its ticker symbol, an investor can place a buy order through their US brokerage account.
Investing Through Taiwan-Focused Funds
Investing in Taiwan’s market can also be achieved through collective investment vehicles like Exchange-Traded Funds (ETFs) and Mutual Funds. These funds offer diversified exposure to the Taiwanese market by holding a basket of securities from the region. ETFs trade like individual stocks on US exchanges throughout the trading day, with pricing that fluctuates with the market. Mutual funds, in contrast, are priced once daily at their Net Asset Value (NAV) after the market closes.
Both ETFs and Mutual Funds provide a convenient way to access a broad segment of the Taiwanese economy without needing to research and select individual stocks. Investors can research Taiwan-focused funds using fund screeners available on brokerage platforms or financial data websites. Examples include the iShares MSCI Taiwan ETF (EWT) or other funds that track Taiwanese indices or invest primarily in Taiwanese companies. When purchasing these funds, investors should consider the expense ratio, which represents the annual operating costs of the fund. Buying an ETF involves searching for its ticker symbol and placing an order, while mutual funds are purchased by specifying a dollar amount.
Understanding Financial Considerations
Investors engaging with Taiwanese equities should be aware of specific financial considerations that can impact their returns and tax obligations. Currency exchange rate fluctuations, even when trading in US dollar-denominated instruments like ADRs or funds, can influence investment outcomes. If the New Taiwan Dollar (NTD) weakens against the US Dollar (USD), the value of underlying Taiwanese assets, when converted back to USD, can decrease, affecting returns.
Dividends paid by Taiwanese companies, whether directly or through ADRs and funds, may be subject to foreign withholding taxes. Taiwan generally imposes a 20% withholding tax on dividends for non-residents. US investors may be able to claim a foreign tax credit on their US income tax return using IRS Form 1116 to offset taxes paid to Taiwan, potentially avoiding double taxation on this income.
Accessing reliable information about Taiwanese companies is also important. For ADRs, companies file annual reports, such as Form 20-F, with the US Securities and Exchange Commission (SEC), providing detailed financial data. Investor relations sections on company websites and reputable financial news sources offer valuable insights.