Vietnam's Fractured Investment Thesis

The Market Vectors Vietnam ETF

, the lone ETF exclusively devoted to the Southeast Asian country, started 2012 with a bang, ranking as one of the top-performing ETFs of any kind in the first quarter. Following a nasty sell-off in May, the second quarter was not as kind to VNM, but until last week, the fund had been showing signs of stabilizing. Then came news of the arrest for two noteworthy Vietnamese banking scions, headlines that dealt a blow to investor confidence in the country's banking system. What is ironic is that Vietnam is a former French colony and it is the French that have a term for these kind of unforeseen events. "Force majeure," or act of God, is arguably not an exaggeration when comes to the impact recent events in Vietnam have had on VNM. The arrest of tycoon Nguyen Duc Kien, one of the founders of the Asia Commercial Bank, has struck fear in the hearts of investors that previously had not

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VNM's fall from grace over the past week was nothing if not predictable. Like so many emerging markets ETFs, though it should be noted Vietnam is classified as a frontier market, VNM is heavily allocated to financial services stocks. Add up stocks labeled banks, diversified financials and insurance firms and there is nearly a third of the fund's weight. So it is not surprising that financial services sector strife would damage this ETF. Now investors, particularly foreigners, are apt to view Vietnam's banking systems as unstable and corrupt. In the wake of Kien's arrest, that is a natural reaction. However, it is also fair to say Vietnam is not the only country in the world with banking issues. For example, "stable" is not the adjective to be used to describe Europe's banking sector. What is lost amid all the negativity now surrounding Vietnamese financials is that the country's banks

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With VNM down 7.6 percent in the past five sessions, it is understandable that investors are taking a cautious approach to the fund, but there are signs of some dip buying in Hanoi. Vietnamese equities

relative to the broader emerging markets universe, but some buyers appear to be using the dip to get involved with some speculative fare. During Wednesday's Hanoi session, buyers stepped in to lift materials, real estate and securities names,

. Real estate and materials stocks combine for 18.4 percent of VNM's weight.

VNM celebrated its third birthday earlier this month, so it is fair to say the $265.1 million fund has been around the block a time or two. For nearly all of its three years of existence, during which the fund has slid 35.4 percent, VNM has been volatile. High inflation and the central bank's proclivity for currency devaluations have made VNM a tricky bet, but the cautionary tale that is the Vietnam investment thesis does not end there. Foreign direct investment is an integral part of any developing nation's economic picture and Vietnam faces some intense competition for that capital. Ensconced in controversy and facing macro headwinds, Vietnam could struggle to attract foreign capital. That is especially true given that foreign investors have not been shy about pouring money into other Southeast Asian markets such as Indonesia, Malaysia and Thailand, all of which qualify as lower risk than Vietnam. The other side of the coin is that foreign direct investment to Vietnam has been fair this year. FDI disbursements totaled $6.25 billion in the year's first seven months, equaling to 99.2 percent of that in the year-earlier period, while fresh FDI commitments also reached $7.02 billion, or 67.7 percent of the year-ago figure,

. All told FDI to Vietnam this year could hit $15 billion. A surprise to the upside would indicate some investors are willing to look past the antics of a few corrupt tycoons to see a bull case for Vietnam's economy. As for VNM, the fund's recent tumble is instructive. A look at the

shows that over VNM's recent history, the time to buy has not been when the fund is wrapped in ebullience, but rather after the dust has settled following high levels of controversy. That opportunity could arrive in the near-term. For more on Vietnam, click

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