Vietnam may be familiar to the American public, after a lengthy war fought in the 1960s and 1970s, but the country isn't all that popular among investors. But after shifting from a highly centralized planned economy to a socialist-orientated market economy, the country has become significantly more attractive to international investors.
Vietnam's Changing Economy
Vietnam's economy began as a largely agricultural feudal system until French colonization in the mid-19th century. After the country's regions developed very different economies, they became further politically divided in 1954, with the north embracing communism and the south embracing capitalism, eventually setting the stage for the Vietnam War.
Between the 1970s and 1990s, Vietnam was a member of Comecon and heavily dependent on the Soviet Union and its allies. The dissolution of Comecon led to trade liberalization, currency devaluation, and a policy of economic development. Throughout the ensuing 1990s, tens of thousands of businesses were created and the economy grew at a rapid clip.
The growth briefly came to an abrupt halt during the Asian Financial Crisis in 1997, pushing the country to focus on macroeconomic stability rather than growth. Since then, the economy has grown to a gross domestic product (GDP) of $122.7 billion, stable credit rating, strong exports to the U.S., and modest public debt relative to its growth rates.
Investing in Vietnam with ETFs
The easiest way to invest in Vietnam is using exchange-traded funds (ETFs), which provide instant diversification in a single U.S.-traded security. With $268.2 million in assets under management and a modest net expense ratio of 0.76%, the Market Vectors Vietnam ETF (NYSE: VNM) is the most popular fund for investors looking for exposure to the country.
The Market Vectors Vietnam ETF offers exposure to publicly traded companies that are primarily domiciled and listed in Vietnam and/or generate at least 50% of their revenues from the country. As of December 2012, the fund held approximately 33 different companies consisting of 45.9% financials, 21.5% energy, and 10.6% industrials, among other sectors.
While this is one of the only ETFs offering exposure to Vietnam, investors should be aware that the fund is heavily weighted in financials (45.9%) and small cap stocks (47.1%).
Benefits & Risks of Investing in Vietnam
Vietnam's economy involves a number of different benefits and risks that international investors should carefully consider. While the country's rapid growth rates may attract investors, they should carefully consider the higher risk profile, government controls, and reliance on key industries to support that growth over the long-term.
Benefits of investing in Vietnam include:
- Rapidly Growing Economy. Vietnam's economy has been growing at between 4% and 8% since its recovery from the Asian Financial Crisis of 1997.
- Reliance on Key Industries. Vietnam relies on the petroleum industry for its domestic energy consumption and for export; crude oil product is expected to gradually decline.
Risks of investing in Vietnam include:
- Socialist-orientated Economy. Vietnam may have transitioned from a centrally planned economy, but the government still controls many key industries.
- Early Stage Market Economy. Vietnam remains at an early and vulnerable stage of its economic development and is therefore more risky than developed markets.
Key Points to Remember
- Vietnam may be familiar to the American public, after a lengthy war fought in the 1960s and 1970s, but the country is just starting to gain investor attention.
- The Market Vectors Vietnam ETF (NYSE: VNM) is the most popular fund for investors looking for exposure to the country with diverse exposure.
- Investors should keep in mind the many benefits and risks associated with investing in Vietnam, including its economic circumstances and reliance on key industries.