Investing in Vietnam had been all but impossible for the rank and file until lately. BRIC (Brazil, Russia, India, and China) countries have been all the rage since Goldman Sachs economist Jim O’Neill coined the acronym in 2001. While these markets are certainly far from mature, the financial crisis of 2008 proved that they are more closely aligned with western economies than previously thought.
Looking to invest in markets with less correlation than developed countries, many investors are now discovering frontier markets. Described as less liquid and more volatile than emerging markets, frontier market countries are often politically unstable and extremely unpredictable. Still, for investors able to stomach market shakiness, huge potential lies ahead.
Vietnam is a perfect example of a frontier market economy. Still a communist country, Vietnam is making slow but steady progress in implementing a market based economy. The Ho Chi Minh City Stock Exchange was established in 2000 and has grown substantially since then.
According to the CIA World Factbook, Vietnam’s per capita GDP in 2009 was $2900. Although many countries experienced negative growth, Vietnam’s GDP increased by an impressive 5.3%. Low wages combined with increased political stability make Vietnam ripe for increased foreign investment.
Foreigners are allowed to directly purchase stock in Vietnam, but it’s a hassle that isn’t worth the effort for retail investors looking to put small amounts of money to work. In August of 2009, Van Eck Global launched an ETF dedicated to Vietnam. With 32 securities and a net expense ratio of .99%, this is by far the easiest and most cost effective way to gain exposure to the Vietnamese stock market. Simply called the Vietnam ETF (VNM) the fund replicates the Market Vectors Vietnam Index.
The index includes companies that “predominantly are domiciled and primarily listed in Vietnam and which generate at least 50% of their revenues from Vietnam.” As a result, only 68.6% of index companies are actually located in Vietnam. The remaining companies do a substantial portion of their business in Vietnam, but are based on other countries.
While the fund has mostly traded sideways since inception, it has certainly generated substantial investor interest. At the close of the first quarter of 2010, fund assets stood at $131 million. At that time, Van Eck estimated the P/E ratio to be 18.58 with a dividend yield of 2.41%. Investors should take P/E and dividend yield information with a grain of salt, as extreme volatility is common and expected when investing in frontier markets.
Those willing to roll with the market’s punches will almost certainly be rewarded. If history is any guide, just look to countries such as Thailand, Taiwan, and South Korea to see how rapidly an impoverished country can be transformed.
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