VietFund Management (VFM), a locally domiciled fund manager, kicks off marketing today for Vietnam’s first onshore exchange-traded fund.

The ETF will track the VN30 Index, consisting of 30 stocks traded on the Ho Chi Minh Stock Exchange (Hose). It is expected to list and begin active trading in September.

Unlike the existing pair of offshore ETFs dedicated to Vietnam equities, the new ETF, because it is structured as a domestic security, will be able to track any locally listed equity without running into ceilings on foreign ownership.

“The ETF can own any stock in the index of any size, which means foreigners can own as much as they want provided they have a local brokerage account,” said Le Anh Tuan, head of research at Dragon Capital, part owner of VFM. “That is because the ETF has a local licence and is managed by a locally domiciled fund manager.”

The timing is propitious. The two offshore ETFs, managed by Van Eck Global and db X-trackers, have seen their combined assets under management rise quickly over the past year to nearly $1 billion.

“Vietnam is on the map,” said Lawrence Brader, a portfolio manager at PXP Asset Management in Ho Chi Minh City. “The new ETF should drive more foreigners to get a local trading licence.”

A better index?
Dragon’s Tuan says the VN30 should outperform the more established Vietnam Index (VNI), a capitalisation-weighted index of all the companies listed on Hose. That is mainly because it excludes PetroVietnam Gas Corporation, which accounts for 20% of the VNI market cap.

PV Gas is a problem for foreigners because, even though it is very large, its free float represents only 3% of the company’s shares. That means it is either ineligible for many foreign investors or the foreign ownership limit has long since been reached. To be included in the VN30, a stock must have a free float of at least 5%.

The VN30 was launched in 2012. Most of its constituent companies have reached their foreign-ownership limits, including the likes of FPT Corporation, a conglomerate with technology and telecommunication arms; Kinh Do Corporation, a food producer; and Saigon Securities.

Van Eck’s Market Vectors Vietnam ETF tracks a customised index, of which companies listed in Vietnam account for only 70%. It commenced trading on the New York Stock Exchange in 2009 but after a lacklustre period has seen its AUM shoot to $585 million. Its net asset value has risen over the past 12 months by 13.1%, although since inception it is down -2.27%.

Meanwhile db X-trackers’ FTSE Vietnam Ucits ETF, launched in Luxembourg in 2008, has also enjoyed recent inflows and now accounts for $392 million of assets. On a five-year basis it has lost 8.6%, but over the past 12 months it is up 24.5%.

Making a market
The VFM ETF will open the doors to foreigners, but at a small premium. The Van Eck total expense ratio is 72 basis points, while db X-trackers’ is 85bp, but the VFM ETF’s is expected to be closer to 1%. But because it will trade in the local time zone, local traders will not be able to front-run it – as happens daily against the offshore funds, said a Vietnam-based fund manager.

Another issue will be tracking error. Unlike the offshore ETFs, the VFM ETF will not be able to use futures or otherwise arbitrage away differences between the ETF’s trading price and the value of the underlying VN30. Vietnam has no derivatives market.

“Will a large ETF linked to the VN30 distort the market? I don’t know,” says Johan Kruimer, who handles institutional accounts at local broker HSC Securities. “I think to succeed, this product will need to eventually achieve a market cap of $500 million.”

HSC is one of two authorised participants for the VFM ETF, and is also partly owned by Dragon Capital. The other market-maker is BaoViet Securities. Together they will seed the ETF with around $15 million.

Tuan acknowledged that the lack of a futures market makes it difficult for foreign brokers to make a market for the ETF, and said some Japanese firms are exploring whether they can participate. But he thinks local brokers will be able to generate enough liquidity, and that the other advantages of the onshore ETF will draw investor demand.

“This ETF will deepen the market. It will be competitive,” agreed Kruimer.

Dragon Capital formed VFM in 2003 to be a local business for local investors as a joint venture with Sacombank, a private-sector bank. Dragon and VFM jointly manage its portfolios.

Dragon has been a minority shareholder in HSC since 2005 and manages $1.3 billion across its various funds and affiliates.