How Does VN30 Work?

On its debut on February 6, the VN30 dipped 1.94 points to close at 447.47 but, with the new calculation method, the positions of some stocks on the market had big changes. Companies with more freely traded shares and good liquidity offered new opportunities for investors.

 

Unlike the VN-Index, the VN30 does not rely too much on a few heavyweight stocks described as the culprits that lead to the distortion of market performance. These stocks have large market capitalisation (outstanding shares are multiplied by current market values) but are relatively illiquid.

 

The VN-Index is a capitalisation-weighted index of all the companies listed on the Hochiminh Stock Exchange (HOSE); thus, it is largely driven by five heavyweight stocks, namely Vincom (VIC), Masan (MSN), Vietcombank (VCB), Vietinbank (CTG) and Baoviet Holdings (BVH). According to a report released on February 1, 2011 by Ho Chi Minh City Securities Corporation (HSC), the quintet accounted for 47.89 percent of total capitalisation value on HOSE, led by VIC (11.2 percent), VCB (10.59 percent), MSN (10.31 percent), CTG (9.05 percent) and BVH (6.74 percent).

 

Despite their huge influence on the VN-Index, some of them like VCB, CTG and BVH have very low free float ratios because State shareholders hold a vast majority and because of imposing restricted transfers (shares held by the members of the board of directors, managers, supervisors, affiliated institutions, and strategic shareholders).

 

Meanwhile, with the calculation of market capitalisation, free float and liquidity, the VN30 will be free from the influence by this group of stocks. This group of five VN-Index driving stocks will account for 34.62 percent, with VCB falling to 4.09 percent, BVH to 3.11 percent, CTG to 7.42 percent, VIC to 10 percent and MSN to 10 percent.

 

In contrast, the weight of STB in the VN30 Index increased to 10 percent from 3.4 percent in the VN-Index. Eximbank (EIB), FPT and Hoang Anh Gia Lai (HAG) rose to 10 percent, 6.67 percent and 3.3 percent from 3.38 percent, 2.04 percent and 1.83 percent, respectively.

 

A number of stocks with high free float rates and liquidity like STB, EIB, CAN and FPT, together with VIC and MSN, become the pillars of the market.

 

Although the new index cannot abolish the entire influence of heavyweight stocks, according to Mr Tran Dac Sinh, HOSE Chairman, the performance of the VN30 Index will best represent the relation of share supply/demand given the inclusion of most liquid stocks.

 

Included in the VN30, many stocks have the opportunity to be better known because they catch more attention from investors. Mr Tran Dac Sinh said that the VN30 - a tracker index - can provide more opportunities for investors. In particular, this is the basis for the development of index tracker funds and exchange-traded funds that boost market liquidity.

 

Experts pointed out that with its high degree of representation (of sector, capitalisation, free float, liquidity and other criteria), the VN30 completely meets criteria of index-investing fund management companies.

A securities company brokerage director said that the establishment of index investing funds is another step of several big fund management companies when open-ended funds have been allowed for operation. Possibly, some index investing funds will take the VN30 as the reference instead of the VN-Index or creating their own portfolios as previously.

 

“It is still too early to make a final assessment, but the VN30 is creating new opportunities for investors, including domestic individual investors,” said an expert. An index investing fund usually creates index-tracking portfolios with the weight of a stock similar to the density of such stock in the market index, he added. If the VN30 is selected as a reference, funds will have to buy shares in this basket to create index-tracking portfolios. And, this move will help boost the demand for VN30-included stocks.

 

With the increased density in the VN30, such stocks as STB, EIB, FPT and HAG will catch more interest of index investing funds. This explains why stocks in this basket have advanced sharply in recent times.