The Benefits and the Risks of Investing in Vietnam
Vietnam may be familiar to the American public, thanks to a long war fought in the 1960s and 1970s, but the country has begun to attract the attention of investors. After shifting from a highly centralized planned economy to a socialist-orientated market economy, the country has become significantly more attractive to international investors looking to diversify into frontier markets.
Here is a look at Vietnam's changing economy, how investors can gain exposure, and some important benefits and risks to consider.
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 $219.8 billion, stable credit rating, strong exports to the U.S., and modest public debt relative to its growth rates.
The country's economy is heavily reliant on foreign direct investment to attract capital from overseas, but that capital has been producing strong economic growth. PricewaterhouseCoopers recently estimated that the country may be the fastest-growing of the world's economies with a potential annual GDP growth rate of 5.2%, which would make it the world's 20th largest economy by 2050.
Investing in Vietnam with ETFs
The easiest way to invest in Vietnam is by using exchange-traded funds (ETFs), which provide instant diversification in a single U.S.-traded security. With $387.7 million in assets under management and a modest net expense ratio of 0.7%, 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 its revenues from the country. As of December 2015, the fund held approximately 30 different companies consisting of 44% financials, 15% energy, and 14% consumer staples, 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 (44%) and small-cap stocks (68%). These factors may make investors in the fund overexposed to financial concerns - such as interest rate changes - while experiencing greater volatility than larger blue-chip equities.
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. These factors may make the country too risky for some portfolios.
The Benefits of Investing
- Rapidly Growing Economy. Vietnam's economy has been growing at between 4% and 8% since its recovery from the Asian Financial Crisis of 1997.
- Self-Powered Economy. Vietnam relies on the petroleum industry for its domestic energy consumption and for export; crude oil production is expected to gradually decline.
The Risks of Investing
- 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, riskier than developed markets.
Key Points to Remember
- The U.S. fought a long war in Vietnam during the 1960s and 1970s.
- The country is starting to gain investor attention.
- The Market Vectors Vietnam ETF (VNM) is a popular ETF for investors.
- Investors should keep in mind Vietnam's economic circumstances and reliance on key industries.