New Vietnam ETF: 3 Reasons to Proceed with Caution

Not surprisingly, there was a great deal of excitement that surrounded the inaugural trading day of the Market Vectors Vietnam ETF (VNM). The new vehicle began its journey on Friday, August 14, 2009.

Certainly, VNM gives you an inside track on a fast-growing Asian economy. In 2008, Vietnam grew at a 6.5% clip. Even in recession-ravaged ‘09, the IMF has forecasted 5% growth for the increasingly visible country.

In the rush to get more “exposure” to an exotic land, however, you may want to wear a fair amount of sunscreen. In other words, be cognizant of how to exit as well as enter a position.

Here are 3 reasons to be ”cautious” in your approach:

1. It isn't cheap.

One of the magnificent benefits of exchange-traded funds are the low cost of ownership. Unlike mutual funds that carry an average expense of 1.4% annually, ETFs typically cost 0.4%-0.5%.

According to the Van Eck Market Vectors web site, VNM’s annual expense ratio is 0.99% due to a cap on expenses. After it expires on May 1, 2010, however, the expense ratio may be 1.4%… exactly like a mutual fund.

2. Fundamentally speaking, it isn't cheap either.

At present, the S&P 500 SPDR Trust (SPY) has a price-to-earnings ratio of 15. The iShares MSCI Emerging Markets Fund (EEM) has a P/E of 19. As published on the Van Eck web site, the Market Vectors Vietnam Index that VNM is tracking has a P/E of 20.3.

It is true that we should expect to pay more for growth. Yet a P/E of 20 may be a bit rich when compared to a pan-emerging market approach in EEM or a more established emerger in China. The iShares 25 China Index (FXI) has a P/E of 25.

3. What’s the Market Vectors Vietnam Index?

We spoke about the benefit of lower costs; the lower one’s costs, the higher one’s returns. Another high profile benefit of ETFs is the ability to track established index performance. Indexing not only allows for complete transparency of the companies you invest in, but it also allows for a comprehensive understanding of historical trends.

Vietnam didn’t have a functional stock market until 2000, which presents uncertainty all its own. Still the Market Vectors Vietnam Index was created in mid-October, 2008… less than 1 year ago.

One-third of the companies are not Vietnamese, but rather, companies that generate a substantial part of their revenue from Vietnamese operations. And 37% of the index constituents are financial companies where the long-term viability of financial services is not well known. In all, there may not be a better way to get as much Vietnam exposure than with the new VNM, but VNM is not a typical exchange-traded index fund.

There are plenty of positive trends for the country of 85 million people. Half the residents are coming into their primary earning years. And estimates peg foreign direct investment as having tripled from $20 billion to $60 billion between 2007 and 2008.

Indeed, the Market Vectors Vietnam ETF (VNM) is intriguing. Nevertheless, it’s an investment where you’d be well-advised to tread lightly.

Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.

Comments

[Alan Young:]

Another issue is tracking price. I put in a bid to buy shares at the NAV--where an ETF should be trading-- and it took two days to fill, since people seem to be buying it at a premium. That's unwise.

Still, it's a good bet. The Hanoi market is small; foreign money flooding in will shoot prices up. Take profits before the bubble bursts.

Aug 19 08:37 AM

[Old Trader:]

I think its typical when a new CEF/ETF debuts, it'll trade at a premium to NAV. Add to that the current bloom in EMs, and its no wonder it took you 2 days to get a fill.

Best wait a month, or so...in all likelihood, the price will have subsided.


On Aug 19 08:37 AM Alan Young wrote:

> Another issue is tracking price. I put in a bid to buy shares at
> the NAV--where an ETF should be trading-- and it took two days to
> fill, since people seem to be buying it at a premium. That's unwise.
>
>
> Still, it's a good bet. The Hanoi market is small; foreign money
> flooding in will shoot prices up. Take profits before the bubble
> bursts.

Aug 19 09:28 AM

[topshelf:]

Ironic or coincidental; a few months ago I tried to scope out a Vietnam position. All I could find was one issue, CAVI.ob. If you DD, it reads like a great Spec play. I was told that for Vietnam to prove itself, it would have to do that via this Cavico Corp. Only because of your article I went to my Watch List and found it didn't pop up. Seems like today the symbol has changed to CAVO.ob, and must have done a Reverse Split, looks like 10 to 1 --- at least I hope so, or I missed a 10-bagger. Anyone know this one?/ its slim-pickens in Vietnam, and I could accept that they would have to use this issue "IF" they want to prove themselves.
www.cavicocorp.com/web...

Aug 19 11:11 AM

[Thomas Smic...:]

I'll wait for Cuba, when, and if.......

Aug 19 01:22 PM

[Mad Hedge F...:]

tyi. Now that we have figured out that Vietnam is a great place to invest, we welcome the news that the Van Eck group is about to launch its own Vietnam Index Fund (VNM). The venture will invest in companies that get 50% or more of their earnings from that country, with an anticipated 37% exposure in finance, and 19% in energy. This will get you easily tradable exposure in the country where China does its offshoring. Vietnam has been one of the top performing stock markets this year, at its peak rising by an amazing 110%. It was a real basket case last year, when zero growth and a 25% inflation rate took it down 78% from 1,160 to 250. This is definitely your E-ticket ride. Vietnam is a classic emerging market play with a turbocharger. It offers lower labor costs than China, a growing middle class, and has been the target of large scale foreign direct investment. General Electric (GE) recently built a wind turbine factory there. You always want to follow the big, smart money. Its new membership in the World Trade Organization is definitely going to be a help. Until now, the only way to get involved with this country was to go through the tedious process of opening a local currency brokerage account, or buy a region sub emerging market ETF. I still set off metal detectors and my scars itch at night when the weather is turning, thanks to my last encounter with the Vietnamese, so it is with some trepidation that I revisit this enigmatic country. Throw this one into the hopper of ten year long plays you only buy on big dips, and go there on vacation in the meantime. Their green shoots are real. But watch out for the old land mines.

Aug 19 03:28 PM

[Ron Rowland:]

Alan, the NAV is somewhat meaningless for ETFs trading in the US based on securities in other parts of the world where the markets are closed.

The NAV cannot be updated while our markets are open except for currency fluctuations. The NAV is based on the last price, which was the overnight closing prices.

This is par for the course with Asian ETFs. With European ETFs, at least you get a couple hours in the morning where our markets overlap.

Aug 19 05:30 PM