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The Market Vectors Vietnam ETF (NYSEARCA:VNM) has rallied up 31% year to date to lead the emerging markets category. Vietnamese stocks have become more attractive to foreign investors due to enticing valuations and improved liquidity in local stock markets.

"Foreign investors have been attracted to Vietnam over the past few years, given its relatively young population, entrepreneurial culture, low labor costs (relative to China), and attractive growth outlook. Economic growth and development has progressed at a rapid clip over the past 20 years, albeit off a very low base. Vietnam began to open up its centrally planned, primarily agrarian economy starting in 1986 by encouraging the establishment of private businesses and foreign investment," Patricia Oey wrote for Morningstar.

The valuations for Vietnamese stocks are attractive, as recent Bloomberg data cited that the VN Index trades at 11.2 times estimated earnings, which is 7.4% below the average valuation for the MSCI Frontier Markets Index, reports Victories Stilwell for Bloomberg.

"Nobody has cared about Vietnam in the last five to six years, but now confidence is starting to drive the market," Kevin Snowball, CEO of PXP, said in the report. "It's had a good start to the year, and the way it's moving is a typical early bull market path."

Furthermore, the State Securities Commission is trying to merge the two stock exchanges in Vietnam, which will bring much needed liquidity to local stocks. Regulators have been working on the liquidity issue for some time, however, if the two exchanges merge, lower costs and liquidity should invite more foreign investment. In turn, this would be profitable for most brokerages and banks in Vietnam, reports Benzinga. VNM weights almost half of the portfolio to the financial sector.

Although Vietnam has experienced its slowest growth rate in 13 years, inflation is not a problem and does not seem to be a threat in the near future. Vietnamese policymakers are trying to move forward with better trading at local exchanges and having less tolerance for corruption and limits on foreign ownership and investments.

Market Vectors Vietnam ETF

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Tisha Guerrero contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Source: Vietnam ETF Up 31% In 2013