(Bloomberg) -- Taiwanese officials appear increasingly concerned about a surging equity market, with the central bank governor warning a frenzy for local exchange-traded funds could cause the benchmark to overheat. 

“Everyone is buying like a swarm of bees,” said Taiwan’s central bank governor Yang Chin-long at the Legislature Thursday, answering lawmakers’ questions about the surging popularity in ETFs tracking Taiwanese stocks. “It is becoming something of a bandwagon, just like sheep jumping in one after another.” 

He added that such funds helped drive up risk in the stock market, which could lead to greater volatility in the long term. 

Yang’s comments come as retail investors in Taiwan rush to snap up ETFs linked to local stocks amid strong gains for the benchmark Taiwan Stock Exchange. Pre-initial public offering subscriptions of several high-dividend funds have reached record highs over the past couple of weeks. Some brokerages have even stopped accepting new investors as the incoming funds overwhelm their operations, according to local media reports. 

The Taiex index has surged to repeated new highs over the past few weeks, driven by strong global demand for technology hardware linked to the artificial intelligence boom. 

“When stocks go up, everyone chases the high,” Yang said Thursday. “When they come down again, they’ll all be affected. A lot of investors have no idea what ETFs are.”

He warned the rapid gains could be a market bubble and urged investors to “think calmly.”

The Financial Supervisory Commission has been conducting a round of financial inspections on some investment trust companies — the firms that issue ETFs — amid the frenzy. One of the areas that regulators are specifically watching out for is how fund houses have promoted their products with the help of online influencers, the Taipei-based Commercial Times reported Wednesday. 

In late February, the financial regulator said it would tighten the rules to help protect investors in response to the rapid growth in ETFs. Some of the measures the FSC has proposed are tougher rules on information disclosure and preventing issuers offering out-sized discounts or premiums. 

The size of Taiwan’s ETF market has risen to NT$4 trillion ($127 billion) as of the end of January, up more than 60% versus a year earlier, according to an FSC statement. ETFs accounted for 57.6% of Taiwan’s total onshore funds, the statement said.

--With assistance from Argin Chang.

©2024 Bloomberg L.P.