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.