Ding Dong: Currency Devaluation Plagues Vietnam ETF

China is not the only Asian country that has recently devalued its currency nor are China exchange traded funds the only ones tracking countries in the region that have been slammed by the extreme currency interventions.

Vietnam, previously a prolific devaluer of its currency, the dong, is back at it again. In fact, 2015 marks the fourth year in the past six that the Southeast Asian nation has intentionally weakened the dong and was the case following prior instances of dong devaluation, the Market Vectors Vietnam ETF VNM is feeling the pain.

Ding Dong

VNM, the lone ETF dedicated to Vietnamese stocks, is down 5.4 percent in the past week, 11.5 percent over the past month and if the support area the ETF is currently flirting with, a return to the 2013 lows is likely. Not surprisingly, VNM's lowest levels of 2013 were seen less than 90 days after, a dong devaluation.

This time around, market observers see the dong devaluation as a response to China's similar move. The theory makes sense as a Vietnam is also an export-driven economy and central banks in such economies, particularly in Asia, will take drastic moves to defend their countries' exporters.

“The State Bank of Vietnam (SBV) devalued the dong (VND) by 1 percent against the dollar on Wednesday—its third adjustment so far this year—and simultaneously widened the trading band to 3 percent from 2 percent previously, the second increase in six days,” according to CNBC.

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Although VNM is not large in terms of number of holdings (it holds just 30 stocks), the ETF is levered to the Vietnamese export story because it allocates over a quarter of its weight to consumer sectors and 44.1 percent to financial services firms, the companies that are lending to other parts of the Vietnamese economy.

“Having debuted in August of 2009, the fund recently celebrated its five year anniversary trading live, and as one may expect the underlying index being based on the domestic equity market of Vietnam is not incredibly deep to the limitations of the country still being on the fringe of Frontier/Emerging markets territory,” said Street One Financial Vice President Paul Weisbruch in a recent note.

Intended or not, Weisbruch's comments about Vietnam's market status are well-timed if not prescient because the country has not been shy about its desire to earn a coveted promotion from frontier to emerging markets status from index provider MSCI. The problems with that promotion are threefold for Vietnam.

• First, Vietnam is not even on the list of countries MSCI is considering for such an upgrade.
• Second, it can takes to earn the promotion after being added to the list. Just look at Qatar and United Arab Emirates.
• Third, Vietnam's heavy-handed approach to managing its currency is probably not something index providers look favorably upon.

Vietnam is currently the ninth-largest country weight in the iShares MSCI Frontier 100 ETF FM at a weight of almost 3.5 percent. Home to heavy weights to two OPEC members, Kuwait and Nigeria, and several other major oil producers, FM is off almost 10 percent this year. That is to say further weakness from Vietnamese equities will not be welcomed by this ETF, either.

VNM had a P/E ratio of just over 15 at the end of July, which is a slight discount to FM and a noticeable premium to the MSCI Emerging Markets Index.