High Risk, High Reward: How to Invest in Vietnam’s Frontier Market

Still a communist country, Vietnam is making slow but steady progress toward a market-based economy.

Investing in Vietnam was all but impossible for everyday retail investors until recently. Ever since Goldman Sachs economist Jim O'Neill coined the acronym in 2001, BRIC countries (Brazil, Russia, India, and China) have been all the rage.

While these markets are far from mature, the 2008 financial crisis proved they are more closely aligned with Western economies than previously thought.

The Rise of Frontier Markets

Looking for investments with lower correlation to developed nations, many investors are turning to frontier markets.

Less liquid and more volatile than traditional emerging markets, frontier economies often carry higher political instability and unpredictability.

Still, for investors able to stomach the market shakiness, significant potential lies ahead.

Vietnam is a textbook example. Despite its communist government, the country continues to implement market-based reforms.

The Ho Chi Minh City Stock Exchange was established in 2000 and has grown substantially ever since.

Economic Resilience and Opportunity

According to the CIA World Factbook, Vietnam's per capita GDP reached $2,900 in 2009.

While many countries suffered negative growth during the global downturn, Vietnam's GDP expanded by an impressive 5.3%.

Low wages combined with increasing political stability make the country ripe for foreign investment.

How to Invest: The VanEck Vietnam ETF

Foreigners can purchase stock directly in Vietnam, but the administrative hassle isn't worth it for retail investors putting smaller sums to work.

In August 2009, VanEck Global launched a dedicated ETF to solve this problem.

Holding 32 securities with a net expense ratio of 0.99%, the Market Vectors Vietnam ETF (VNM) offers the easiest, most cost-effective way to gain exposure to the Vietnamese market by tracking the Market Vectors Vietnam Index.

The index targets companies that generate at least 50% of their revenues from Vietnam.

Because of this rule, only 68.6% of the portfolio companies are physically headquartered in Vietnam. The rest do a substantial portion of their business in the country while being based elsewhere.

Risks and Long-Term Outlook

While VNM has mostly traded sideways since its inception, it has generated significant investor interest.

By the end of Q1 2010, fund assets reached $131 million. At that time, VanEck estimated the fund's P/E ratio at 18.58 with a dividend yield of 2.41%.

Investors should take valuation metrics like P/E ratios and yields with a grain of salt. Extreme volatility is both common and expected in frontier markets.

However, those willing to roll with the punches could be rewarded over the long term.

If history is any guide, look to Asian Tigers like Thailand, Taiwan, and South Korea to see how rapidly an emerging economy can transform.

Walking Street, Pattaya, Thailand