Investors poured billions into Taiwan’s exchange-traded funds this year, driven by a frenzy over artificial intelligence stocks. The surge comes despite escalating tensions with China, which claims Taiwan as its own, raising concerns about potential market volatility.

ETF Inflows Surge Despite War Fears

By March, Taiwan’s ETF market reached 4.74 trillion New Taiwan dollars ($145.8 billion), showing strong growth. That’s a 77% jump from a year earlier — far outpacing the 20% rise in the benchmark equity index over the same period. Investors want exposure to Taiwan’s AI supply chain, which has driven a rally making ETFs popular among local and foreign buyers.

But the rapid inflows have regulators and market watchers on edge. The Financial Supervisory Commission (FSC), Taiwan’s top financial regulator, has voiced caution. Hwang Howming, a vice director-general at the FSC, told Reuters that protecting investors’ interests remains a priority amid the ETF boom.

Peter Yang, manager of an ETF at Fuh-Hwa Securities Investment Trust, said clients are asking how much higher Taiwan stocks can climb after the index topped 20,000 points. The pace of investment, combined with borrowed money fueling the rally, has increased the risk of a sharp reversal.

Volatility Hits as Geopolitical Tensions Rise

But the ETF craze has faced some setbacks. On April 19, Taiwan’s benchmark index fell 3.8%, losing 774 points in the biggest single-day drop in years. Foreign investors sold heavily, with ETFs among the top-sold assets.

The selloff was triggered by a warning from TSMC, the world’s largest chipmaker, about restrained global demand, and by rising geopolitical risks.

There are reports that everyday investors, like students and Buddhist nuns, have started investing in ETFs. Some have taken on debt or mortgaged homes to join the rally, stoking fears about less experienced investors getting caught in a downturn.

Frank Hung, a Taipei hotel manager, views ETFs as a convenient and low-risk way to invest in Taiwan’s booming tech sector. Still, analysts warn that the market’s rapid ascent amid geopolitical uncertainty could prove fragile.

AI Tech and Trade Wars Fuel Market Swings

Taiwan’s role as a key player in AI chip production has caught investors’ eyes. But the US-China trade war makes the picture. New US restrictions on AI chip exports to China sent shockwaves through tech stocks, with Nvidia dropping nearly 7% and AMD falling 7.4% in a single day. The selloff wiped billions from market caps and rattled investor confidence.

Chinese tech shares listed in Hong Kong slid 3.7%, while safe-haven assets like gold surged. The Philadelphia semiconductor index and ETFs tracking major AI and chipmakers dropped sharply. These moves underline the fragility of the global tech supply chain amid escalating trade tensions.

The US has tightened controls on AI tech, opening a new chapter in its rivalry with China. The fallout is hitting US tech giants hard, despite their massive cash reserves. Investors wonder if the White House will reconsider after the market turmoil caused by previous sanctions against companies like Apple.

Gold and Safe Havens Gain Amid Uncertainty

With Taiwan’s tech stocks shaky, investors are turning to traditional safe havens. Gold prices hit a record $2,772 per troy ounce recently and have surged over 30% this year. The largest gold ETF, SPDR Gold Shares, has attracted about $5 billion in inflows over six months, signaling strong demand.

Central banks worldwide are buying gold aggressively, with a record 483 tons purchased in the first half of the year. Countries like Turkey, India, and China are diversifying away from the US dollar amid fears of economic sanctions and US sovereign debt concerns. Economist Mohamed El-Erian highlighted how this trend reflects a strategic shift among middle power countries aiming to reduce dollar dependence.

Physical gold sales have also soared. Retailers like Costco are selling out of gold bars regularly, with monthly sales estimated at $200 million. The yellow metal’s appeal is clear as investors hedge against market swings and geopolitical risks.

Taiwan’s ETF market is buoyed by AI enthusiasm, though trade wars and geopolitical tensions threaten stability. How investors balance the promise of tech growth against the risks of market volatility and geopolitical conflict will shape Taiwan’s markets over the next few months.