Market Vectors Vietnam ETF: Look Elsewhere
Summary The Market Vectors Vietnam ETF has lost 10.59% in the past year, while the VN Index has gained 5.45%. Vietnam is most successfully navigated by actively managed funds, that invest in companies that are undervalued and have high dividend yields. Foreign Ownership Limitation in Vietnam is another factor that attributes to the poor performance of the Market Vectors Vietnam ETF. Investment has been shifting towards Vietnam, due to some of the following factors that make investment in this country attractive: GDP growth of 6.12% in the second quarter of 2015. Manufacturing shift to Vietnam, due to wages in Vietnam being 46% lower than China . High youth population that is highly ambitious, making it an attractive destination for investment. Publicly listed companies that are undervalued and pay higher dividends relative to other countries in Asia. Vietnam can be characterized as a country with acceptable risks and high returns. However, there is a large discrepancy between the performance of investment funds in Vietnam. Choosing to invest in the wrong investment fund can be the difference between high returns and negligent returns or losses. The Market Vectors Vietnam ETF (NYSEARCA: VNM ) has lost 10.59% in the past year, which is very strange considering that the VN Index has gained 5.45% in the past year. While exchange traded funds provide low management fees and convenient access to global equity, a fund that loses substantially in a market like Vietnam should be a red flag for investors. Those wishing to gain exposure to Vietnam should give serious consideration as to whether this fund is a true reflection of the opportunities in Vietnam. While I am personally bullish on Vietnam and invest directly in listed equity in Vietnam, I question the value of this fund. Top Holdings of Listed Equity in Vietnam Taking a closer look at the top holdings of the fund’s listed equity, we can see that the top holdings are not a true reflection of the growth potential of Vietnam. The average P/E ratio for these companies is 17.8, the average 2014 ROE was 12%, and the average 2014 ROA was 5.1%. Strategic Navigation The average valuation is not at all attractive, as the average P/E ratio in Vietnam is 12.5. Actively managed investment funds that invest in a diversified portfolio of securities, with a lower P/E ratio than average, have been extremely successful. Moreover, targeting the SME sector is another effective strategy, which has allowed some funds to have dividend yields of 10%/year . It is clear to see that Vietnam is most successfully navigated by actively managed funds, that invest with the criteria of low valuation and high dividend yields. Compared to the VN Index, and especially actively managed funds, the performance of the Market Vectors Vietnam ETF is inferior. These investment funds, which are not listed on US Exchanges, provide verification that there is extreme opportunity for profit in this region, which is not reflected in the performance of the Market Vectors Vietnam ETF. Foreign Ownership Limitation The foreign ownership limitation is another factor in Vietnam that impacts the performance of foreign investment funds. The foreign ownership limitation in Vietnam generally restricts foreign ownership of listed equity to 49%, although it is limited to 10% or 30% in other cases. The Market Vectors Vietnam ETF does not currently invest in shares of companies that are fully held by foreign investors. This restricts the fund from investing in highly valuable companies that foreign investors are actively seeking, even to the point of being willing to pay a premium of up to 20% . PXP Vietnam Asset Management is another extremely successful company in Vietnam, whose success is partially attributed to the fact that 52.5% of its portfolio NAV is comprised of companies that are fully held by foreign investors. ETF Skepticism Exchange Traded Funds can sometimes be desirable, as they are characterized by low management fees and can sometimes produce desirable returns for investors. However, the case with Vietnam seems to be very clear; the most profitable venture for investors is to invest in actively managed funds or invest directly on the stock exchange in Vietnam. The inability of this fund to invest in companies that are fully held by foreign investors and its failure to invest in companies with low valuation are both factors that attribute to the fund’s poor performance. Sure the ETF is near its 52-week low and maybe there is some chance of profit, but it is clearly not the best form of investment in Vietnam for those seeking to leverage off of the long-term opportunities that Vietnam presents. I personally trade directly on the stock exchange in Vietnam, would never invest in this ETF, and believe that Vietnam is best navigated by the previous investment funds that I mentioned in this article. Alternatives Listed on US Exchanges Finding worthwhile investments in Vietnam that are listed on US Exchanges is very challenging, since there are not any ADRs specifically for Vietnam. However, investors can consider the following as alternatives for the Market Vectors Vietnam ETF: Vietnam Holdings Ltd . ( OTC:VNMHF ): Vietnam Holdings Ltd. is a close ended investment company that invests in listed equity in Vietnam. The company currently has a P/E of 5.33 and is investing in two companies, which are fully held by foreign investors, including DHG Pharmaceutical JSC and Vietnam Dairy Products JSC. These two factors may make it a worthwhile pursuit for investors. Samsung Electronics Co. Ltd. ( OTC:SSNLF ): Investors can also gain exposure to Vietnam indirectly by investing in Samsung, which shifted its manufacturing from China to Vietnam because of lower wages. Some of the holdings of the Market Vectors Vietnam ETF are listed on US Exchanges. These include Emerson Radio Corporation (NYSEMKT: MSN ), Student Transportation Inc. (NASDAQ: STB ), and DCP Midstream Partners LP (NYSE: DPM ). Conclusion Investors wishing to gain exposure to Vietnam should avoid the Market Vectors Vietnam ETF. The most attractive investments include investment funds not listed on US Exchanges, and directly investing in listed equity in Vietnam. However, the above alternatives that are listed on US Exchanges can be examined as potential alternatives. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.