Vietnam ETF Surging: Can It Last? - ETF News And Commentary

Vietnam is performing remarkably well among the developing economies. The country which saw slow growth, high inflation, and poor banking structure is now receiving back major contributions from the agricultural and industrial sectors. This has made Vietnam a leading exporter, and has attracted more foreign investors to this corner of the Southeast Asian market.

Economy Outlook

The growth prospects for Vietnam are currently quite optimistic. At present, Standard and Poor's rates Vietnam at BB- (stable). Meanwhile, the government debt to GDP is close to 37%, which has declined considerably from recent years, while the industrial production rate has also increased year over year as well.

The overall Vietnamese economy has got a boost from the World Bank's Country Partnership Strategy (CPS) 2012 – 2016. The program supports the economy's competitiveness, enhances environmental sustainability and expands social and economic opportunities for the poor.

The Good News

In recent news, Vietnam's Prime Minister Nguyen Tan Dung has approved the formation of an asset-management company to acquire non-performing loans. He also oversaw considerable increase in foreign direct investment. This will solve liquidity problems at Vietnamese banks.

Trading revenues and investment banking in the region surged to $13 billion last year while the Ho Chi Minh City Stock Exchange's VN Index has advanced to 8.6% year to date from a six-week low on April 22. This has kept investors hooked on the markets for investment opportunities (see Best ETFs to Start 2013).

Furthermore, out of the 10 original Millennium Development Goal (MDG) targets, Vietnam has already achieved 5 and is on track to achieve the next 2 by 2015, suggesting that great strides are being made.

The Downturn

Not everything has been great out of Vietnam lately though, as on April 29^th the International Monetary Fund (IMF) lowered the growth outlook for Vietnam from 5.8% to 5.2% for 2013 and from 6.4% to 5.2% for 2014 due to a slow restructuring of Vietnam banks.

Given this, some investors may be questioning an investment in Vietnam, as a lowered growth rate could signal trouble ahead for the volatile country (See Is the Vietnam ETF Worth the Risk?)

Still, given the better-than-most growth rate, and strong domestic economy, some might be willing to roll the dice on Vietnam. If you are feeling as though the country's recent run can continue, the following ETF may be worth a closer look:

Van Eck Market Vectors Vietnam ETF (VNM)

Launched in August 2009, VNM is a passively managed fund and is the only option available to investors seeking pure play exposure to the Vietnam equity space. The fund currently holds 30 securities in its basket and mostly comprises Vietnam-listed stocks at 70% with major allocations in mid cap and small cap securities.

The ETF is heavily concentrated in its top 10 holdings into which it puts 59% of the total assets. Hence, the returns of the fund are largely dependent on the performance of the top 10 firms (see more ETFs in the Zacks ETF Center).

Sector-wise, the finance sector is the biggest, comprising stocks of Joint Stock Commercial Bank for Foreign Trade of Vietnam, Baoviet Holdings and Vingroup Joint Stock Company, which on their own contribute a 22% share. Other than financials, energy, industrials and real estate also get double-digit allocation in the fund with a share of 15.3%, 11.9%, and 10.5%, respectively.

The product compiles $466.5 million in its asset base and trades in a good volume of more than 390,000 shares a day. The fund charges 76 basis points in fees and provides a dividend yield at 1.77%.

The Vietnamese ETF has been amongst the best performing emerging market ETFs in the developing Asia region. The fund has a Beta score of +.85 indicating close monitoring with the index, and has a year-to-date return of more than 17% suggesting strong performance as well.

Bottom Line

The ETF is more volatile when compared to broader benchmarks, mainly due to recent development in the banking sector and foreign cash inflows in the country. The ETF is currently under-priced compared to other Southeast Asia ETFs, however, it has high growth potential thanks to a surging domestic market (see Southeast Asia ETF Investing 101).

The product is also good for investors seeking international diversification, as it has 3 year R-squared value of 24% with the S&P 500 index, implying the fund has a marginal correlation with the U.S. equity market performance.

Best of all, VNM currently has a Zacks ETF Rank of #2 or ‘Buy', suggesting that it would continue to outperform this year, and thus be an excellent choice for investors seeking a different type of emerging market exposure, especially given the weak performance of many other developing nations as of late (read: Zacks ETF Rank Guide).

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