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Trade Pact to Boost Taiwan ETF

NEW YORK (TheStreet) -- With a date finally set for a landmark trade-deal to be signed between Taiwan and China, investors may find that now is a good time to look at iShares MSCI Taiwan Index Fund (EWT).

Scheduled to be signed Tuesday, the deal, known as the Economic Cooperation Framework Agreement, is already being hailed as the most significant economic agreement between the two parties in the past 60 years.

The bulk of the deal consists of reducing tariffs on more than 800 products.

All in all, the deal is expected to result in a $100 billion increase in two-way trade over the Taiwan Strait.

Although closer relations between Taiwan and China may make some politicians in Beijing and Taipei nervous, the trade deal is expected to be welcomed by businesses and subsequently by markets.

Investors can bet on the success of the new economic deal by using a China ETF such as iShares FTSE/Xinhua China 25 Index (FXI) or Claymore/AlphaShares China Small Cap (HAO). However, I think EWT would be a more direct play on the impact of the trade deal than HAO or FXI because its smaller economy will mean that the boost in trade will be more noticeable. With 120 holdings, EWT's largest two holdings command more than 20% of net assets in the fund. The first company, Taiwan Semiconductor Manufacturing (TSM), specializes in making semiconductor equipment for a variety of electronic devices.

Because TSM accounts for 13.8% allocation of net assets, EWT will be affected by long and mid-term trends in shares of this holding. Recently though, this could prove to be a good thing as there has been a steady flow of positive news from the semiconductor sector as 2010 has progressed.

In a broader sense, EWT will generally receive direction from information technology companies since these represent a 60.9% section of the fund's sectoral allocation. The next largest sector in the ETF is financials, which account for only 14.4% of the fund's exposure.

The fund's second largest holding is Hon Hai Precision Industry. Foxconn, the company that was in the news recently for giving wage increases at electronic device manufacturing plants in China after a spate of worker suicides, is an important division of Hon Hai.

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