In a year of strength for emerging markets equities and exchange traded funds, some single-country ETFs tracking smaller emerging and frontier economies may be going overlooked. It can be said that's the plight of the VanEck Vectors Vietnam ETF (NYSE: VNM).
VNM is up 13 percent year-to-date, a solid though not spectacular showing among single-country emerging and frontier markets funds. Frontier markets are being mentioned here because Vietnam is classified as a frontier market by the major index providers, such as MSCI Inc. (NYSE: MSCI).
Vietnam is the third-largest country weight in the iShares MSCI Frontier 100 ETF (NYSE: FM), the standard among diversified frontier markets ETFs. The southeast Asian country accounts for 11.6 percent of FM's weight, trailing only Kuwait and Argentina in the frontier fund. FM is up nearly 18 percent year-to-date, indicating VNM is trailing a broader basket of frontier stocks.
Reviewing The Lag
“Most of this under-performance has stretched back further than 2017, as we see in the trailing one year period VNM has lagged behind FM by nearly fifteen hundred basis points,” said Street One Financial Vice President Paul Weisbruch in a note out Thursday.
VNM's underperformance relative to FM isn't necessarily an indictment of Vietnamese stocks. FM soared early this year on news that Pakistani stocks would be promoted to the MSCI Emerging Markets Index. Additionally, the frontier ETF was boosted by speculation that MSCI would decided to promote Argentina to the MSCI Emerging Markets Index.
Although that promotion did not materialize for Argentina, the run-up in the country's equity markets prior to the MSCI announcement was an important driver for FM's upside earlier this year.
Speaking Of Indexes...
Vietnam is also eyeing a promotion to emerging markets status and while such a move isn't imminent, some market observers argue that Vietnam was more deserving of that promotion than Pakistan.
“VNM is a very specific ETF in that the local underlying market is rather small in terms of diversification and market capitalization size, and the fund only holds twenty-six individual securities,” said Weisbruch.
That reflects the relatively small size of Vietnam's equity markets and the bulk of the local market capitalization is tied up in a small number of stocks. VNM is a credible play on the Vietnamese consumer, however, as the consumer staples and discretionary sectors combine for about 35 percent of the ETF's roster.
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