Pullback in Vietnam ETF Could be a Buying Opportunity
Shares of the Market Vectors Vietnam ETF (NYSE: VNM), one of the best-performing ETFs of any stripe over the past month, lost more than five percent today in what is the fund's worst day trading in multiple months.
What can be viewed as some solace for traders that are already long VNM and those kicking themselves for missing a 25 percent rally over the past month (before today's loss) is the reason why VNM slumped on Friday. Fortunately, it would appear that none of negative catalysts that have previously rocked VNM, including but not limited to currency devaluations and arrests of banking scions, were at play Friday.
In addition to VNM's Friday decline perhaps being a case of some natural profit-taking, the fund's retrenchment could be attributable to a rarely discussed element of the ETF's structure. As one trader pointed out to Benzinga, there is a limit on how many new shares of VNM can be created per day. That limit is one creation unit, or 50,000 new shares.
Since VNM has been rapidly rising in recent weeks, it is reasonable to assume most of the new share creation demand has come from buyers. As the trader noted, when buyers are controlling VNM's share creation, those looking to short the ETF get shuffled to the back of the line because of the creation limit.
Not all ETFs are subject to this scenario, but VNM is likely because of trading band limits within the local Vietnamese market. Currently, stocks listed on the Ho Chi Minh Exchange can only trade within a five percent band while Hanoi Stock Exchange issues have a seven percent band. In an effort to boost liquidity, Vietnamese regulators are lifting those bands to seven percent and 10 percent, respectively, next week, Reuters reported.
News of the higher trading bands could a boon for VNM beyond the obvious catalyst of improved liquidity for Vietnamese equities. Increase trading bands could mean more fees for Vietnamese banks and brokerage houses, implying an avenue to bolster revenue. Remember, VNM allocates about 45 percent of its weight to financial services stocks and it has been a more sanguine environment for Vietnamese banks that has helped propel the ETF in recent weeks.
Interestingly, Friday's decline in VNM obfuscated what should have been some good news for the fund. Looking for ways to bolster an economy that is coming of its slowest year of GDP growth in 13 years, Vietnamese Prime Minister Nguyen Tan Dung announced that companies there will not have to pay corporate or value added taxes for the first half of this year, according to the Wall Street Journal.
There are other near-term catalysts that could signal Friday's decline is a buying opportunity in VNM. The government is expected to make official a debt asset management company to resolve bad bank by the end of this month.
The State Bank of Vietnam is considering boosting foreign ownership limits in Vietnamese banks, which currently cannot exceed 30 percent of the bank's charter capital and the country's State Securities Commission is launching a pilot program to experiment with the idea of foreign firms owning more than 49 percent of Vietnamese companies.
Obviously, a 5.1 percent loss in a single trading is never fun for those that are long the security that endured the drop. Then again, VNM has been moving higher in straight-line fashion, indicating this pullback was going to happen at some point. With the fundamental case for VNM still in tact, Friday's action could prove to be a minor pothole on VNM's road to higher returns.
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