ETF: New Development Step of Vietnam Stock Market

According to experts, the advent of ETFs will produce positive effects on the stock market. However, investors should cautiously and thoroughly consider all pros and cons before investing in this fund because it still has certain limitations typical of a new fund.

 

A report by Bao Viet Securities Company (BVSC) shows that following the overheating growth from 2006 to 2010, the Vietnamese financial market sank into crisis when inflation and interest rates surged, which was reflected in CPI growth and caused the bubble burst. This also sent the economy into recession. From 2012 to the present, with dozens of the Government’s regulations, economic instability began to show signs of slowing; macroeconomic stability policies started to produce effect; credit growth slowed down to 10-15 percent a year; inflation and exchange rates were controlled; and interest rates were reduced and kept low.

 

Remarkably, the growth rate gap between Vietnam and other countries in the region began to narrow since 2013. Although Vietnam retained stability, it failed to translate it into growth. Specifically, profit margin growth (net profit on revenue) concentrated in a few sectors such as technology, finance and consumer goods. Meanwhile, most other sectors like electricity, water, basic materials had low profit margin growth. Thus, the economic growth depends heavily on sectors as well as inputs of each sector in certain periods of time.

 

With three restructuring goals of the Government, namely credit institution system restructuring, State-owned enterprise restructuring, and investment environment improvement by joining free trade agreements like TPP, Vietnam - EU FTA and ASEAN Economic Community, the most important thing is to improve labour productivity. Then, the economic growth is stable.

 

Regarding investment prospects, the restructuring success of banks and real estate companies in improving bad debt ratio and financial leverage ratio begets a very effective investment channel in the future. Besides, FTA-benefiting exporters will also have growth potential. Furthermore, when ETFs are established, large cap stocks or ETF index-tracking stocks will become the apple of investors’ eyes.

 

Remarking on ETF advantages, Nguyen Xuan Dinh, Deputy Director of Analysis Division at Bao Viet Securities Company, said, in addition to be traded as ordinary shares, allowed to use leverage to buy fund certificates, ETFs usually have low transaction fees (1 - 1.5 percent), portfolio diversification, risk diversification, higher openness and transparency (due to daily disclosure of net asset value - NAV), and relatively good liquidity (as investors can trade on both primary and secondary channels). Besides, no foreign ownership limit is applied to domestic ETFs and fund certificate prices approximate NAV (+/-5 percent).

 

Most developed stock markets have ETFs because they are actively managed funds. According to statistics, 50 percent of ETFs in the United States are actively managed short-term funds winning over S&P500. Consequently, the probability of ETFs winning over current indices in Vietnam like VN30 and HNX30 is quite high.

According to securities experts, investors still suffer risks in investing in ETFs because of systematic risks or overall market risks.

 

Mergers and acquisitions (M&A) and stock split may lead to a certain degree of deviations of index simulation. This difference of profitability of ETF portfolios and indices is affected by M&As, share splits, share consolidations and portfolio restructuring, especially when the market is illiquid.

 

Another difference between ETFs with stocks and other funds is the holders of ETF certificates may lose the right to vote at shareholder meetings and to receive dividends to fund management companies. If investors buy foreign ETF funds, they will also incur exchange risks because they usually use foreign currencies. However, with a floating-controlled exchange mechanism in Vietnam, this is really not too big problem for investors.