Many Americans are familiar with Vietnam, due to the long war fought in the 1960s and 1970s. But the country has begun to attract the attention of U.S. investors. The economy made a shift from a highly centralized to a socialist-oriented market. Since then, it has become much more attractive to those looking to diversify into frontier markets.
Here is a look at Vietnam's changing economy. Learn how you can gain exposure as well as some benefits and risks to keep in mind.
Vietnam's Changing Economy
Vietnam's economy began as a largely agricultural feudal system until French colonization in the mid-19th century. The country's regions developed very different economies. Then, they became further politically divided in 1954. The north of the country adopted communism; the south adopted capitalism. This set the stage for the Vietnam War.
Between the 1970s and 1990s, Vietnam was a member of the Council for Mutual Economic Assistance, also known as CMEA or Comecon. It was heavily dependent on the Soviet Union and its allies. When CMEA dissolved, it led to trade liberalization; it also led to currency devaluation and a policy of economic development. Throughout the 1990s, tens of thousands of businesses were created. The economy grew at a rapid clip.
The growth briefly came to an abrupt halt during the Asian Financial Crisis in 1997. This pushed the country to focus on macroeconomic stability rather than growth. Since then, the economy has grown to a gross domestic product (GDP) of $271.2 billion. It also has a stable credit rating, strong exports to the U.S., and modest public debt relative to its growth rates.
Vietnam's economy relies on foreign direct investment to attract capital from overseas. But that capital has been producing strong economic growth. PwC estimated that the country may be the fastest-growing of the world's economies; it could have a potential annual GDP growth rate of 5.2%. This would make it the world's 20th largest economy by 2050.
How Can You Invest in Vietnam with ETFs?
The easiest way to invest in Vietnam is by using exchange-traded funds (ETFs). These provide instant diversification in a single U.S.-traded security. The VanEck Vectors Vietnam ETF (NYSE: VNM) is the most popular fund for investors looking for exposure to the country. It has $550.1 million in assets under management; it also has a modest net expense ratio of 0.61%.
The VNM ETF offers exposure to publicly traded companies that are primarily based and listed in Vietnam and/or make at least 50% of its revenues there. As of June 2021, the fund held more than 35 different companies. It consists of 28% real estate, 16% IT, 14% consumer staples, as well as other sectors.
This is one of the only ETFs offering exposure to Vietnam. But be aware that the fund is heavily weighted in mid- and small-cap stocks (44% and 45% respectively). If you invest, you could come across greater volatility than larger blue-chip equities.
What Are the Benefits and Risks of Investing in Vietnam?
Vietnam's economy involves benefits and risks that you should carefully consider before investing. While the country's rapid growth rates may entice you. But be sure to think about 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.
The benefits of investing include:
- Rapidly growing economy: Vietnam's economy has been growing quickly. Through 2020, its growth rate had been 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 energy consumption and for export; crude oil production is expected to decline.
Risks of investing 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. That means it is riskier than developed markets.
- Vietnam is starting to gain attention from investors.
- The VanEck Vector Vietnam ETF (VNM) is one of the most popular ETFs for those investing in Vietnam.
- Keep in mind Vietnam's economic circumstances and reliance on key industries.