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Is the Vietnam ETF Worth the Risk? - ETF News And Commentary
4/2/2013 11:12:00 AM
A slow growth rate, higher inflation level, and weak banking system are factors which impacted the Vietnamese economy to a great extent in 2011. The economy expanded at its slowest pace in years in 2012 as a drop in bank lending hampered domestic demand.
However, it led to measures from the government to overhaul the financial system, which acted as a net positive on the country going forward ( 2012 Was Forgettable for These Emerging Market ETFs ).
These new government reforms, positive demographics, and large foreign inflows led to a recovery in the economy. In fact, in 2013 the economy has been performing quite well with Vietnamese equities gaining a great deal of strength.
Inside the Turnaround
It can be said that growing investor confidence in the market is largely accountable for this surge in Vietnamese securities. The government aimed to reduce the high level of debt in the Vietnamese banking system, with the objective of stimulating further investment in the economy thanks to an investor confidence boost.
Additionally, Vietnamese stocks continue to shoot up on the back of the country's economy gaining strength and are still valued low. These stocks have not only provided investors with plentiful profits, but are also pretty inexpensive compared to certain sectors.
Among peers, valuations are also low compared to their own historical levels, and particularly when compared to other key Southeast Asia nations, such as many surging securities in Thailand ( THD ) , or the Philippines ( EPHE ) .
The Vietnamese economy has massive growth potential and is characterized by favorable demographics, a competitive manufacturing base, stable policies and increasing disposable income. The region also has close proximity to China which could be beneficial from a trade perspective ( 5 ETFs for Countries with Highest Employment Rates ).
The economy has received a further boost due to the country's plans to increase foreign ownership, as yet limited in Vietnamese companies. The current quarter could see a ramp up in cap limit of foreign ownership in Vietnamese companies and industrial sectors from the current 49%.
The central regulatory State Bank of Vietnam is also considering increasing the foreign ownership limit in Vietnamese banks from 30% currently.
Moreover, a continuous effort to curb inflation is showing results. The country in March posted a fall in its inflation rate at 6.64% compared to 7.02% reported in February. A somewhat tighter monetary policy can be attributed to this fall in inflation levels, and could help the country going forward.
Still, the bad debt level of banks remains a matter of concern for the economy. Higher level of bad debt has not only dampened consumer demand, but has limited any company's ability to raise capital and encourage expansion.
At the same time, efforts are on, to bring down the debt level. Towards this end, a debt asset management company has been set up in order to tackle the problem.
Amid some critical issues facing the economy, Vietnam seems to be growing steadily as it appears to be facing those problems head on. It thus appears that 2013 may prove to be year of reasonable growth for the economy ( Is the Vietnam ETF Back on Track? ).
A look at ETFs tracking the economy depicts the same story. The ETF which proved to be a laggard in 2012, seem to have turned around in 2013.
The strength in Vietnamese equities is quite palpable with one ETF tracking the economy. Market Vectors Vietnam ETF ( VNM ) has been one of the best performing ETFs of the year with year-to date gains of 7.8% ( 3 Foreign ETFs Still Beating the S&P 500 ).
VNM in Focus
VNM tracks the Market Vectors Vietnam Index, and expands on this local exposure to include offshore companies that generate at least 50% of their revenues in Vietnam. Consequently, it also holds firms that are listed on U.K., Thai, Malaysian and Indian stock exchanges.
This has resulted in a portfolio consisting of 31 stocks in which the fund invests an asset base of $443.3 million. Volume is quite good though, as it comes in at roughly 600,000 shares a day.
The scope of diversification is minimal in the fund, as the top ten holdings take up 59.4% of the asset base. Among individual holdings, Baoviet Holdings gets the top position in the fund with a share of 9.55%.
It should be noted that despite the fact that banks in Vietnam are heavily burdened with bad debt, the ETF has maximum exposure in the financial sector. Financials play a very dominant role in performance of the ETF with a share of 42.1% in the fund.
One noteworthy point here is that despite a heavy focus towards financial sector, the fund has performed really well in the New Year and has rewarded investors with good profits ( Best ETFs to Start 2013 ).
Among other sector holdings, energy and industrials get double digit allocation in the fund with respective shares of 20.5% and 12.8%. The fund charges a fee of 76 basis points annually.
VNM currently has a Rank of 2 or Buy with our Zacks ETF Rank, and is capable of delivering big gains to investors. However, volatility is a significant problem with this fund, while premium/discount issues can also come into the mix.
Still, given the underlying fundamentals of this ETF and its low level of correlation with many markets, it could be worth a closer look by some. Just make sure you have a high risk tolerance and can stomach big moves, as large swings are bound to happen with this intriguing emerging market ETF.
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ISHARS-MS PH IM (EPHE): ETF Research Reports
ISHRS-MSCI THAI (THD): ETF Research Reports
MKT VEC-VIETNAM (VNM): ETF Research Reports
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