Vietnam ETF Could Offer a Year-End Surprise

Southeast Asia has not been immune from economic controversy this year.

ETFs tracking Indonesia, the region's largest economy, have plummeted due to the country's widening account deficit and sagging rupiah. The iShares MSCI Malaysia ETF EWM look good for a minute after national elections there earlier this year, but the fund wilted in the face of Federal Reserve tapering chatter. And the list goes on.

Related: Asia's Former Darling ETFs Hemorrhage Cash.

The Market Vectors Vietnam VNM has not been immune from the tumbles experienced by other Southeast Asia ETFs. As was the case last year, VNM has gone through another summertime swoon in 2013. When things get tough for VNM, the problems are usually attributable to Vietnam's banking sector. The financial services sector accounts for nearly a third of VNM's weight.

In 2012, VNM sank following the arrests of some Vietnamese banking scions that exposed corruption in some of the country's largest financial institutions. This year, VNM's summer swoon was not only the result of the tapering debacle, but Vietnam's struggle's to efficiently implement a plan to absolve banks of toxic assets and sour loans.

The Vietnam Asset Management Company, or VAMC, is Vietnam's TARP equivalent and it has, to this point, been slow-moving and unimpressive.

"Fitch expects any recovery in the banking system to be gradual, depending on the pace and effectiveness of reforms, and regulatory discipline. The Vietnam Asset Management Company (VAMC) may not tackle many of the asset-quality issues in the near term because some aspects of its operations are still unclear and regulatory rules to improve asset-quality data transparency have been delayed until June 2014. Banking consolidation and reform of state-owned enterprises are likely to progress slowly over the medium-term," according to Fitch Ratings.

That does not mean VNM does not offer potential for year-end gains. In each of the previous three years, the ETF has performed well in the fourth quarter, but beyond seasonal trends, there is a decent fundamental backdrop for Vietnamese equities.

While VNM has posted a gain of just 1.1 percent this year, local stocks have surged 16 percent, good for one of the region's best performances. Even VNM's meager gain is better than what investors would have been treated to with the iShares MSCI Thailand Investable Market ETF THD or the iShares MSCI Indonesia ETF EIDO.

Additionally, Vietnamese policymakers seem intent on, for once, tackling inflation rather than driving growth. Few ETFs, save for India funds, have been as vulnerable to inflation over the years as VNM. Inflation is expected to be about eight percent this year, but the government thinks it can get that number down to seven percent next year.

Previously mentioned as a potential upside catalyst for Vietnamese equities is a plan to increase foreign ownership limits. One fund manager quoted by the Wall Street Journal recently said Vietnamese stocks could jump 10 percent if that plan is approved, adding that foreign fund managers could be compelled to reconsider Vietnam if equity markets there become more liberalized.

VNM does offer investors another ace up its sleeve. The country has a current account surplus. Investors do not have to overpay for that surplus, either. VNM has a price-to-book ratio of 1.22, well below those of the comparable China and South Korea ETFs, two markets which have recently been lauded for their discounts relative to the broader emerging markets universe.

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Disclosure: Author does not own any of the securities mentioned here.