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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 (NYSEMKT:IF) which, by the way, has been a stellar performer this year.

Source: Three Strikes Against the Vietnam ETF