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Nick Ainsworth, Dragon Capital

The emergence of ETFs in Vietnam and the country’s capital market evolution


Nick Ainsworth (pictured) of Vietnam headquartered Dragon Capital brings an overview of the ETF market in Vietnam, from a participant’s perspective… 

Nick Ainsworth (pictured) of Vietnam headquartered Dragon Capital brings an overview of the ETF market in Vietnam, from a participant’s perspective… 

Dragon Capital was founded in 1994 by Dominic Scriven, at a time when the Vietnamese economy was opening during the process of ‘Doi Moi’, or renovation. This was not dissimilar to what had begun in China five years earlier, with a more open approach to private enterprise and global trade. 

The stock market began trading in 2000 after the 1997 Asian financial crisis had largely dissipated and Southeast Asia was investable once more. Dragon Capital became one of the first foreign investors in the country with a true local presence. The company now manages USD5.5 billion of offshore money in Vietnamese assets, mostly public equities but also fixed income securities across several public and private funds. It counts among its investors household name family offices and sovereign wealth funds that have been with the company for many years. 

The company has 130 staff, mostly in Ho Chi Minh City, is very well connected into the local business community, and is largely privately and internally owned. Earlier in 2021 Dragon merged with its domestic sister company VietFund Management, or VFM, which managed locally investable funds and which recently launched the country’s first private pension plan. VFM was a pioneer in the locally listed ETF market, having launched their VN30 ETF in 2014 and is today the largest ETF manager in the country as well as in Southeast Asia. 

An ETF has the advantage of being a simple structure with low trading costs and a high degree of transparency. These are not qualities commonly associated with investments in frontier-designated markets. They are often in the form of high cost open or closed-ended funds and sometimes hybrid private/public security holdings, possibly with uncertain underlying liquidity. 

Vietnam as a frontier market  

While frontier markets are for most investors havens of illiquidity, there has been ETF access to some of them for many years, offering transparency and simplicity. Here we will address the situation as it has been, as it is now, and how it might be in Vietnam, our host nation. As part of the MSCI Global Frontier Index, Vietnam is off limits to many pools of capital even though trading velocity, depth, market cap to GDP, etc. give it the appearance of neighbouring Asian emerging markets and make it a poor comparable to many in the frontier category. Figures 1,2 and 3 offer some perspectives on the market and its activity. Without going into detail, investing in individual securities in Vietnam can be time consuming and frustrating for foreigners, with prepayment and the premiums associated with foreign ownership limits invisible to would-be buyers or sellers. The latter issue will be resolved in due course, possibly as it was in Thailand with NVDRs, but that is some time away. ETFs offer an alternative means of gaining exposure to the local market and is a segment dominated by foreign institutions. ETFs also allow investment in stocks at their foreign ownership limits (de facto favoured by foreign investors) without the customary premium, which was the principle behind the creation of the Diamond ETF, of which more later. 

Dragon Capital Figure 1

Dragon Capital Figure 2

Dragon Capital Figure 3


Humble beginnings 

The first domestic ETF in Vietnam, the VN30 ETF, was launched in August 2014 and started trading on the Ho Chi Minh City Stock Exchange (HOSE) in October 2014 with very limited activity. Further north, the Hanoi Exchange (HNX) welcomed the country’s second ETF – the HNX50 ETF – in December 2014, but this effort was likewise unable to generate interest among retail investors or in the institutional world. 

At that point there were two ETFs tracking Vietnam – the FTSE Vietnam ETF that was launched in 2008 and VanEck’s Vectors Vietnam ETF which was established a year later in 2009. The two ETFs’ substantial combined AUM, in addition to their concurrent rebalancing rounds, used to be a central topic of discussion among the country’s investment community, as additions and removals of stocks would effectively have an impact on stock prices. Retail investors were keen on keeping track of the two overseas ETFs’ components and speculating on additions of new stocks with the view to speculation around the two big ETFs for short term trading returns on those occasions when volumes rose. Retail investors sought quick returns from daily trading rather than steady and sustainable returns, making an asset with market average insufficiently attractive. 

The rise of local ETFs 

Domestic ETF structures, however, come with a twist. Vietnam’s capital market is still considered difficult to access, which is one of the main reasons the country is still not classified as an Emerging Market by MSCI. There is still a difference in the treatment of local and foreign companies in terms of operations – companies with more than 50 per cent foreign ownership are considered foreign in Vietnam, which would make day-to-day operations such as license acquisition, store renting, etc more time-consuming, cumbersome or even impossible. So even though companies are free to open up their Foreign Ownership Limit (FOL) to 100 per cent in an AGM or EGM, many companies still keep their limit for foreign ownership at 49 per cent and below in order to operate as a local company.  

Unsurprisingly, operating as local entities, several foreign-restricted companies are better performing ones on the stock market, which in turn makes their shares more desirable by foreign investors. But in order for foreign investors to purchase shares in a FOL-restricted company, they need to find foreign shareholders in that company who are willing to sell their shares over the counter. And usually, these OTC transactions are executed at up to a 50 per cent premium on the stock’s market price. This premium is visible to the seller, the buyer and the broker only and is considered, rightly or wrongly, to be the principal obstacle to Vietnam’s accession to emerging market status. It is a major source of frustration to institutional investors in the market, many of whom have turned to local ETFs. 

The idiosyncratic solution to this issue comes through locally listed ETFs. Domestic ETFs can invest across the stock market without restrictions on FOLs, while domestic ETFs can be owned by foreigners. So, in practice, foreign investors can use domestic ETFs as a tool to gain indirect access to FOL-restricted companies in Vietnam. And it didn’t take too long for foreign investors to realise this. In 2016, Vietnam was a big topic in South Korea as chaebol (conglomerates) started to invest heavily in Vietnam through FDI. The strong FDI trend set by the country’s chaebol was immediately followed by retail interest in Vietnam’s capital market. Korea Investment Management (KIM) saw the opportunity and set up a synthetic VN30 ETF in South Korea in late 2016, using a swap structure to offer the VN30 Index’s returns synthetically by using the HOSE VN30 ETF as collateral. The synthetic structure was immensely successful in South Korea and, subsequently, played a large role in the HOSE VN30 ETF’s growth in AUM. The HOSE VN30 ETF’s AUM grew 6.4 times within 12 months from VND429 billion in Dec 2016 to VND2,749 billion in Dec 2017. 

This was a transformational moment in the evolution of the Vietnam ETF. Operators in many countries sought to create 100 per cent feeders into the HOSE VN30 ETF to offer local access. Thailand was the second country to establish such a structure. Thai conglomerates had for years been investing heavily in Vietnam but in another manner – through M&A of large corporations to get exposure to the country’s expanding consumer space. Thai corporations’ acquisition of Vietnamese supermarkets and F&B companies made headlines month after month in 2018, stirring retail interest in Vietnam just the same way chaebols did in 2016. Bualuang Securities (BLS), a subsidiary of Bangkok Bank, is a leading securities company in Thailand and was determined to make a VN30 ETF happen. BLS played a big role in launching the first ETF Depositary Receipt (DR) ever in the country that directly feeds 100 per cent into the HOSE VN30 DR. As of May 2021, the VN30 DR in Thailand has passed AUM of THB5 billion (USD160 million) and will continue to be a case study for innovative product development for years to come. 

Dragon Capital Figure 4


The domino effect 

Vietnam-focused ETFs are listed in New York and across many developed markets in Europe and Asia, with the latest and successful offering being listed in Taiwan under the sponsorship of a Taiwanese financial firm. In addition, Vietnam ETFs are offered in Korea and Thailand via swap and depositary receipts respectively. Liquidity varies considerably between the locations where the various Vietnam ETFs are available, as does their correlation with the local market. 

The formation of more new ETFs on the international markets, as well as in Vietnam, highlights the popularity of investing in a product with a simple structure, low management fees, high transparency, and with diversification or concentration depending on the product. The trading of ETFs helps increase market liquidity through daily ETF transactions and during portfolio restructurings.  

Existing stocks in ETF portfolios, and stocks that are predicted to be added to index baskets of ETFs, always attract the attention of investors, especially domestic retail investors who account for about 80 per cent of trading on the three main Vietnamese exchanges, the Ho Chi Minh City Stock Exchange or HOSE, the Hanoi exchange or HNX, and the UPCoM or unlisted public companies market. Between them the daily turnover has been close to USD1 billion or more in the past six months vs USD200 million four or five years ago, with record numbers of new account openings thanks to lower deposit rates being offered by banks.  

Foreign investors have been moving out of individual stocks and into the local ETFs (which are registered as local ownership) for liquidity and the capacity to invest in companies already at their foreign ownership limits. What seems to be disinvestment in the country is more of a change in medium than a change in sentiment as will be seen later. In Vietnam there are very few local institutional investors and there is limited current appeal in an ETF for the retail trader who may prefer to trade index futures at a lower cost, though we feel this may change as financial literacy improves. A broadening in the range of local ETFs has encouraged this transition into passive vehicles and especially into the Diamond ETF. 

The first Vietnam ETF issued by DWS was a synthetic offering, as was the one which followed from Van Eck, using physical replication as a solution. At the time of issue, they provided an opportunity to express interest in a somewhat inaccessible market as it was enjoying a period of strong performance. The ones that have followed are mostly 100 per cent local. 

Figure 5 illustrates the listed Vietnam ETF opportunities, their history and current size with the exception of the Thai DR and Korean swap mentioned earlier, and which feed into one or more of the locally listed funds. ETF development in Vietnam can be broken down into three waves: (i) The foreign pioneers in 2008 and 2009; (ii) The local breakthrough in 2014; and (iii) The domino effect, which can be observed clearly in 2020 with five new local ETFs launched and one foreign launch in 2021 by Fubon.  

Dragon Capital Figure 5


Most of the Vietnam ETFs outside Vietnam have managed to raise AUM rapidly, but local participation has remained small. Local retail investors have been alerted to ETFs as an investment product, as they see foreign money flowing into the local structures but still hesitate to use passive vehicles as stock picking is still the dominant practice. Leverage is available through margin financing offered by brokers and most investors still have a short-term trading mentality. Notwithstanding local ambivalence, the Diamond ETF, launched in the middle of the global pandemic in May 2020, grew 100-fold in 12 months, all thanks to the product’s one simple feature: a dedicated indirect access to foreign-restricted companies. 

Figure 6 shows ETF fund flow into Vietnam from Jan 2020 to May 2021. 2020 saw several Vietnam ETF launches, but the country mostly experienced outflow from ETFs in 2020 and only in Dec 2020 did the trend reverse. As the VN Index started to gain momentum, the Diamond ETF grew exponentially. Fubon’s FTSE Vietnam ETF was launched in 2Q21, offering Taiwan investors more access after China Trust launched a successful fund offering in late 2020. 

Dragon Capital Figure 6


What’s next? 

The Vietnam ETF market is now a billion-dollar enterprise. Relative to the country’s early stage of capital market development, this is sizeable. The contradiction is that most of the capital in local ETFs is still foreign trying to get access, while retail investors don’t seem to be attracted by this form of market access. The ETF market in Taiwan did not pick up until Yuanta launched an inverse ETF, which changed the whole market’s perspective on ETFs overnight. Asian retail investors are punters who chase rushes of adrenaline from making a quick profit and who lack the patience to wait for three to five years to tell if their call is right or not. A reverse ETF gives investors that sense of control, of going against the other players and ultimately the feeling of be able to outsmart the market’s trends. 

Of course, an inverse ETF would be a useful tool to hedge one’s portfolio in a more sophisticated approach to investment management, which would no doubt contribute significantly to AUM growth. A leveraged ETF might excite investors with the possibility of doubling or tripling ROI. This is only likely to be when the local ETFs receive more interest from the retail segment and the issuers invest in investor education. It is conceivable that local interest may increase when more exciting products are available. 

With respect to capital market reform, structures like the Diamond ETF can be seen as an interim solution to the foreign access issue. An Emerging Market upgrade and the access to a broader pool of global capital is unlikely without improved ease of access for foreign investors, either through the establishment of NVDRs, similar to Thailand, or some other solution. The most recent update to Vietnam’s Securities Law took effect on 1 Jan 2021, giving the Prime Minister authority to provide direction on the foreign ownership issue. But with the new cabinet elected just a month ago, this may take time. It is not clear where this issue stands alongside other priorities and especially in the Covid-19 pandemic, where crisis management has been good but where vaccinations and the passport to the post corona world are lagging in Vietnam as they have in much of the rest of Asia. 

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