|Foreign exchange-traded funds foray into Vietnamese frontier. Source: freepik.com |
Last week, British fund Dawn Global launched the Asian Growth Cubs exchange-traded fund (ETF) listed on the New York Stock Exchange (NYSE: CUBS). CUBS is the first active thematic ETF dedicated to public equities in emerging and frontier growth markets, and focuses specifically on five large and fast growing yet historically difficult markets to access, spanning over 860 million people today: Bangladesh, Indonesia, Pakistan, the Philippines, and Vietnam.
“These economies have individually grown GDP faster than 6 per cent a year in USD since 2000. Bangladesh and Vietnam are two of only three countries globally to have compounded GDP growth for 40 consecutive years, including 2020. Yet these markets remain inaccessible to most foreign investors due to little or no ETF coverage or American Deposit Receipt listings,” explained Maurits Pot, founder and CEO of Dawn Global.
Most emerging market investor focus in Asia is on China and India, Pot added, yet there is a compelling long-term, secular growth story for the markets Dawn Global is looking at. “The total population in the region is expected to grow to one billion by 2035, and the average age is 28 in these markets with a burgeoning middle class and accelerating digital adoption,” he said.
Dawn Global believed active investment management is required to identify the most compelling growth companies in these less covered markets as well as to mitigate company and governance risk. The investment process involves top-down company screening and bottom-up company analysis to identify the most compelling investment opportunities.
In March, Fubon Vietnam ETF, the first from Taiwan specialising in investing in Vietnam’s equity market, mobilised around VND8.1 trillion ($352 million) at its initial public offering.
“At the moment, Vietnam seems to be cast in the same mould as Taiwan back in the 1980s. Now they could make a profit through Vietnam’s economic reforms and huge potential via Fubon Vietnam ETF,” said Yang Yining, chief investment officer of the fund. Last year, CTBC Investments, another prominent asset management firm in Taiwan, also launched CTBC Vietnam Equity Fund to cash in on the promising equity market.
Besides foreign ETFs, domestically-established counterparts are also gaining traction. The total value of assets under management of domestic ETFs has soared by 64 per cent to $1 billion so far this year, while foreign equivalents have increased 12 per cent to $1.4 billion, cited Ho Chi Minh Securities Corporation (HSC).
“ETFs are often a cheaper and more efficient alternative to other investment funds, especially during periods of high volatility. Therefore, it is not surprising that Vietnam has followed the trend for these products,” HSC stated. “The number of ETFs in Vietnam, both foreign and domestic, currently stands at 12 funds, seven of which are domestic, with a total value of assets of $2.5 billion.”
According to Nick Ainsworth, chief marketing officer at Dragon Capital, while frontier markets are for most investors a haven of illiquidity, there has been ETF access to some of them for many years, offering transparency and simplicity.
“As part of MSCI Global Frontier Index, Vietnam is off limits to many pools of capital even though trading velocity, depth, market cap to GDP, to name a few, give it the appearance of neighbouring Asian emerging markets and make it a poor comparable to many in the frontier category,” he said.
Foreign investors who want to purchase shares in a foreign ownership ratio-restricted company need to find overseas shareholders in that company who are willing to sell their shares over the counter, Ainsworth added – and usually, these over-the-counter 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 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,” Ainsworth said.
While non-voting depository receipts have not been implemented in Vietnam, ETFs offer an alternative means of gaining exposure to the local market and is a segment dominated by foreign institutions. They also allow investment in stocks at their foreign ownership limits (de facto favoured by foreign investors) without the customary premium.
Thanh Le, associate director of Marketing at Dragon Capital said, “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.”
In one example, the ETF market in Taiwan did not pick up until Yuanta launched an inverse fund, which changed the whole market’s perspective on them overnight.
“Asian retail investors are punters who chase rushes of adrenaline from making a quick profit and who lack the patience to wait for 3-5 years to tell if their call is right or not. A reverse ETF gives investors that sense of control, of going against other players, and ultimately the feeling of be able to outsmart market trends,” Ainsworth said.