SSC to end free ride for ETFs

Vu Bang

According to Vu Bang, chairman of Vietnam’s State Securities Commission (SSC), the watchdog is in the process of drafting up a legal regulation on ETFs to submit the Ministry of Finance for approval.

Bang said the regulation involved setting standards for the funds and establishing an EFT operating framework. “This is to curb the risks for the market,” said Bang.

The SSC’s move coincides with a recent spike in popularity of ETFs in Vietnam. The funds operate by tracking the index of a certain basket of local stocks, then trading this track record like a security in overseas markets.

Because ETF investors profit whenever the index rises and have no interest in the stocks’ actual price, people believe this form of investment is risky for emerging markets.

ETFs came to public attention last year when the benchmark VN-Index of Ho Chi Minh Stock Exchange (HoSE) was strongly supported via only a handful of blue-chip stocks, despite a general downward trend.

Throughout 2010, blue chip stocks including Hoang Anh Gia Lai Group (HAG), FPT Corp. (FPT), PetroVietnam Fertilizers (DPM), Bao Viet Holding (BVH), Masan Group (MSN) and Vincom Corp. (VIC) buoyed the market many times.

Last year, BVH tripled in value while MSN and VIC doubled their worth, despite low attractive basic indicators.

Trinh Hoai Giang, vice general director of Ho Chi Minh City Securities (HSC), said the VN-Index in 2010 did not reflect HoSE movement correctly. He said that the benchmark would have fallen 380 points since November 2010 without the support of its 12 largest market cap stocks.

In recent weeks, the VN-Index has hovered around 480 points, strongly aided by a limited number of stocks including BVH, MSN and VIC. Meanwhile, a slide in liquidity has highlighted investors’ low confidence.

Analysts fear the use of ETFs in emerging countries could damage the entire finance sector, including the exchange rate and the balance of payments.

“If ETFs push too strongly their short-term trading, they can distort the market,” said Nguyen Duy Hung, chairman for Sai Gon Securities Inc.

To date, there has been no official report on ETFs that track VN-Index. Market Vector Vietnam ETF (VNM) – established by Van Eck Global and listed on New York Stock Exchange since August 2009 – and the FTSE Vietnam Index ETF run by Deutsche Bank AG since January 2008 are just two among the ETFs tracking Vietnam stock market.

Hung said that ETFs were quite popular on international stock markets like the NYSE, Singapore or Hong Kong, while they remained “under very tight control” in emerging markets.

In some cases, ETFs are even forbidden.

SSC’s chairman said that the details of the regulation could not be disclosed yet but that ETFs would definitely be controlled more tightly in the future.