Three Strikes Against the Vietnam ETF

The new and long-awaited Vietnam ETF has hit the market with much fanfare.

Unfortunately, it has three strikes against it.

But first here is some basic information on the Market Vectors Vietnam (VNM) as the first U.S.-listed ETF dedicated to Vietnam. It will track the Market Vectors Vietnam index which contains companies that generate at least 50% of their revenues in the country, with financials, energy and materials getting the top weightings. Vietnam represents 67.9% of the index; Singapore, 7.5%; United Kingdom, 6%; Malaysia, 5%. Canada, South Korea, India and Thailand are also represented.

The underlying index, Market Vectors Vietnam Index, currently has 28 constituents. To qualify, companies must generate at least 50% of their revenues from Vietnam or hold a dominant position in the Vietnamese market. Today, that means that about 70% of the index is composed of locally listed companies, with the other 30% being comprised of companies from Singapore (7.5%), United Kingdom (6.0%), Malaysia (5.1%), India (4.7%), Canada (4.5%), and others.

Currently, sector exposure is heavily tilted toward financials at 36.7%, followed by energy (19.1%), materials (12.3%), industrials 12.2%, and consumer staples 10.8%. The top holdings include Viet Nam Dairy Products (11.2%), Hoa Phat Group (7.3%), Saigon Thuong Tin Commercial (7.3%), HAGL (7.3%), PetroVietnam Fertilizer & Chemical (5.5%), and PetroVietnam Drilling and Well (4.7%).

Expenses for the new ETF are estimated to be 1.42% but will be capped at 0.99% until May 2010.

Proponents of investing in Vietnam base it largely on its growth potential. The country has a population that is relatively young with about half of its 90 million citizens under the age of 25. Given the right pro-market growth policies, this could lead to strong economic growth. The Vietnamese economy grew an estimated 3.9% in the first six months of 2009 from a year earlier, and a total of 5% growth is estimated for this year.

Now back to the three strikes.

The first is timing. Based on relative valuations, we are at best at the stage of a yellow caution light and most likely a red warning light when it comes to new investments in any emerging market. This is no fault of Van Eck Global that faces a long regulatory tunnel in bringing new ETFs to market.

The second is political. If one distinguishing facet of some emerging markets is a system based on relationships rather than rules, Vietnam is at the extreme. I do not know why investors would want to take on the political risk of Vietnam and believe its record on political and economic freedom is out of line with other more successful and promising models and markets.

This brings me to the third strike against Vietnam. It is not Indonesia.

Members of Chartwell ETF and Seeking ETF Alpha know that Indonesia offers investors the same growth potential and young population as Vietnam but with the advantages of being a democracy, the fourth largest population in the world, ample natural resources, a consumer-led economy, and substantial opportunities for huge increases in industry and exports if it clamps down on corruption and opens up more to foreign investment.

Therefore, my advice, after the sharp pullback in emerging markets is over, is to skip Vietnam and travel to Indonesia (IF) which, by the way, has been a stellar performer this year.

Comments

[Mad Hedge F...:]

tyuii. 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 03:15 PM

[Ron Rowland:]

The following appears was copied directly from
investwithanedge.com/f...
including all punctuation and paragraph breaks. Although mostly based on facts, it is obviously a cut and paste.

>...being comprised of companies from Singapore (7.5%), United >Kingdom (6.0%), Malaysia (5.1%), India (4.7%), Canada (4.5%), >and others.
>
>Currently, sector exposure is heavily tilted toward financials at >36.7%, followed by energy (19.1%), materials (12.3%), industrials >12.2%, and consumer staples 10.8%. The top holdings include >Viet Nam Dairy Products (11.2%), Hoa Phat Group (7.3%), >Saigon Thuong Tin Commercial (7.3%), HAGL (7.3%), >PetroVietnam Fertilizer & Chemical (5.5%), and PetroVietnam >Drilling and Well (4.7%).
>
>Expenses for the new ETF are estimated to be 1.42% but will be >capped at 0.99% until May 2010.
>

Aug 19 05:21 PM

[Ron Rowland:]

(maybe better formatting this time)

The following appears was copied directly from
investwithanedge.com/f...
including all punctuation and paragraph breaks. Although mostly based on facts, it is obviously a cut and paste.

>...being comprised of companies from Singapore (7.5%),
> United Kingdom (6.0%), Malaysia (5.1%), India (4.7%),
> Canada (4.5%),and others.
>
>Currently, sector exposure is heavily tilted toward financials
> at 36.7%, followed by energy (19.1%), materials (12.3%),
> industrials 12.2%, and consumer staples 10.8%. The
> top holdings include Viet Nam Dairy Products (11.2%),
> Hoa Phat Group (7.3%), Saigon Thuong Tin Commercial
> (7.3%), HAGL (7.3%), PetroVietnam Fertilizer & Chemical
> (5.5%), and PetroVietnam Drilling and Well (4.7%).
>
>Expenses for the new ETF are estimated to be 1.42% but
> will be capped at 0.99% until May 2010.

Aug 19 05:25 PM

[bmw4pmw:]

I would ask Mr. Delfeld to support his "three strikes" theory with evidence as I currently see none, and in fact would like to directly refute his claims.

First, indeed the market has run up tremendously this year. But only after having dropped nearly 80% from the 2007 peak to the Feb 2009 low. Thus, it is still trading at values well below pre-financial crisis levels. Our analysis of forward P/Es for the market conservatively predict 15x, and with listed companies having met nearly 2/3rds of their '09 earnings targets in the 1H with the 2H looking even better, I have trouble understanding on what basis Mr. Delfeld sees Vietnam as overvalued.

Second, Vietnam is rated (by the World Bank mind you) as the most politically stable non-city state nation in the region. Including being much more stable than Mr. Delfeld's beloved Indonesia. Indeed it is a one-party system, but there is extremely minimal dissent, especially if you relate it to the region's other like political system in China. Also it has been my personal experience living and working in the country for the past 2 years that the vast majority of Vietnamese people are content with the current political system, which of course the true mark of stability. If Mr. Delfeld would like to argue Vietnam's political instability being a major reason to invest in Indonesia instead, then the question begs why so many more foreign direct investors are coming to Vietnam rather than Indonesia even if the population is about 1/3rd the size? Vietnam's committed FDI in 2008 was $64bn, or about twice that of India.

Third, by no estimate I have ever seen from the likes of HSBC, Deutsche Bank, Credit Suisse, etc. have I ever seen a claim that Indonesia has the same growth prospects as Vietnam in the long-term. In 2009, yes I expect the 2 countries will have similar growth prospects. But I have little expectation Indonesia will ever grow GDP at 8-9% a year, which is the path Vietnam will resume when international economies have normalized. From an equities return prospective, I would argue Indonesia's democracy has caused much more downward pressure on Indonesian equities than Vietnam's communism has on Vietnamese equities in the recent past. I can't argue that Indonesia is much bigger, but Vietnam was last year ranked as the number 1 emerging market retail market in the world. Vietnam is also resource rich, being East Asia's third largest oil producer.

I would as Mr. Delfeld to back up his arguments with facts in the future instead of making a shameless plug for his own fund at the expense of another competitor fund.

P.S.- As pertains to the first gentleman's comment, Vietnam's GDP grew at 6.18% in 2008, not 0%.

Aug 20 06:22 AM

[CLS123:]

Interesting to note, per strike three, that Van Eck also offers an Indonesia ETF (ticker IDX).

Aug 20 11:38 AM