(Bloomberg) -- Demand for Taiwanese exchange-traded funds, which was booming just a couple of months ago, is falling fast as their performance lags and regulators tighten up on the asset class. 

Taiwanese stock ETFs that started trading this month — touting high dividends — received NT$7 billion ($220 million) in subscription funds, according to Bloomberg’s calculations. Contrast that with the market craze earlier this year, when the Yuanta Taiwan Value High Dividend ETF alone attracted NT$175.2 billion of cash before listing, making it the biggest ETF debut in the world.

Weak relative performance is a letdown for investors who piled into the funds wishing to get the best of both worlds from AI gains on top of rich cash payouts. The dividend-share-heavy Yuanta ETF is up 1.6% since its debut, while the benchmark Taiex index, which has been spurred to record levels thanks to the AI boom, has risen about 8%.

“As the current Taiex rally is driven by mainly high growth sectors in the AI space, the high dividend ETFs in Taiwan do not get the full benefit of the rally,” said Gary Tan, a portfolio manager at Allspring Intrinsic Emerging Markets Equity.

Turnoffs are coming from other directions as well, including officials issuing cautionary statements, tighter regulatory oversight and concerns about asset concentration.

For example, the investment frenzy prompted caution from the island’s lawmakers, financial regulator and central bank governor. Regulators have tightened oversight for ETFs, which may also make issuers more cautious in releasing new products. New, stricter guidance mainly focuses on the funds’ marketing campaigns and how issuers design their stock portfolios.

AI Stock Frenzy Spurs $50 Billion ETF Boom in Taiwan

And because so much cash already flowed into several jumbo-sized ETFs in March, investors may consider themselves fully allocated — on top of being deflated from the ETFs’ underperformance.

“The confidence and eagerness for investors to subscribe to new funds” has been hurt as some popular ETFs have been trading below listing price since their debut, said Russell Mu, head of new business development at KGI SITE, a Taipei-based ETF issuer. “Upcoming ETFs may not be able to attract as much money in pre-IPO subscriptions.” 

Taiwanese stock ETFs saw a net outflow of $150 million in the past two weeks after six straight weeks of net inflows, Bloomberg-compiled data showed. They had peaked at $840 million in mid-April. 

Earlier this month, Shin Kong Investment Trust canceled its plan to fund raise for a local stock ETF because the regulator hadn’t approved its application to issue the product, according to local media.

With all those contributing factors, as frenzied as the initial rally was, investors’ focus may simply be turning elsewhere.

Some fund houses are now turning to other markets and asset classes instead, such as overseas bonds. The next hot theme for the market will be a return to the Federal Reserve’s rate cut prospects, said Ryan Chang, vice president of fixed income at CTBC Investments Co. 

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