VNM VanEck Vietnam ETF

While 2011 was a rough year for many emerging markets, a few stood out as big losers during the time period, outpacing their counterparts on the downside. One of the biggest economies in this category was undoubtedly Vietnam. The country saw inflation reach levels approaching 20% while the currency, the dong, tumbled by 20% against the dollar making imports extremely pricey for many of Vietnam’s poor and middle class. Thanks to this, as well as a surging debt-to-GDP ratio, ratings agencies have downgraded the nation further into junk levels.

As a result of these harsh realities, and the continued rise of other low-cost nations in the region such as the Philippines and Indonesia, the government has been forced to act to reform the economy, hopefully stabilizing the tumultuous nation. The plan is still being developed but stronger corporate governance, a more robust financial sector and state-owned enterprise reform look to be at the top of the list in the latest round of reforms for the Southeast Asian country (read Top Three Emerging Market Consumer ETFs).

Given the still large inflation problem but the proactive government attempts to rectify the situation, the country could be worth a closer look by investors. While most equities in the country do not trade on American exchanges, there is one option in ETF form; the Market Vectors Vietnam ETF (VNM). Below, we take a closer look at this fund for those that are looking to make a play, either long or short, on the volatile Vietnamese economy:

Vietnam ETF In Focus

VNM looks to track the Market Vectors Vietnam Index, which is a rules-based, modified capitalization-weighted, float-adjusted index intended to give investors exposure to Vietnam. This benchmark gives access to publicly traded companies that, predominantly are domiciled and primarily listed in Vietnam and which generate at least 50% of their revenues from Vietnam (currently about 70% of the fund fits this stipulation). The Index also includes non-Vietnamese companies that generate, or are expected to generate, at least 50% of their revenues from Vietnam, or that demonstrate a significant and/or dominant position in the Vietnamese market and are expected to grow. At time of writing, the fund charges investors 76 basis points a year in fees and holds 33 securities in total (read Five ETFs To Buy In 2012).

Currently, financials dominate the basket, making up close to 44% of total holdings while energy (25.1%) and industrials (12.1%) also take up sizable allocations as well. In terms of top holdings, Vincom takes the top spot at 9.5% and it is trailed by Vietin Bank and JSC Bank which make up 7% and 6.7%, respectively. It should also be noted that the fund has a definite tilt towards mid and small cap securities as large caps make up just 12.5% of the fund. For performance, it has been an extremely rough time for VNM as the fund has lost close to 46.5% in the past 52 weeks compared to a loss of just 19% for the more broad-based Asia-focused ETF ADRA. Returns over the past quarter aren’t that much better, as VNM has fallen by 16.8%, or roughly a 2,000 basis point underperformance when compared to ADRA (read Three Worst Performing Leveraged ETFs Of 2011).

For many it is probably hard to be bullish about the Vietnamese economy in the short-term given the terrible performance in 2011 and the ongoing issues outlined above. Yet for some, there could be reasons to be bullish after this huge fall. First, the P/E ratio of the fund is just 7.4 while the P/B and P/S ratios are both trending around the 1.25 mark as well. These figures, along with a decent dividend yield which should more than cover the expense ratio, could present a solid value case to investors willing to take on very risky assets.

Either way, 2012 looks to be another rocky year for the Vietnamese economy with its short-term future resting on the outcome of the nation’s plans to curtail inflation. Beyond this issue, however, developed market growth could also weigh on the economy as well, especially since close to 20% of the nation’s exports go to the U.S. and another 10% go to Japan. If these economies can stay afloat, Vietnam could do better than most think (see Ten Best New ETFs of 2011).

Yet beyond these developed market issues, there is the wildcard of China and its currency, the yuan. Many investors think that China will be forced to revalue its currency higher in the coming years but if a rough slowdown hits the nation that could be a while off. If this happens, it could keep those seeking low cost production facilities in the country for a little longer, potentially hurting Vietnam as an alternate choice for these key exporters. Should these situations go in Vietnam’s favor, VNM could see a strong rebound in 2012, but if the status quo prevails and inflation remains near 20%, a continued sell-off in this Vietnam ETF should probably be expected by most.

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