With the accomplishment in striving against COVID-19 in the first half of 2020, the Vietnam economy has once again become one of the most potential investment destinations for both domestic and foreign investors in Asia in the next half of 2020 not to exclude stock market (Thuy 2020). Despite the sky-rocketing equity market, foreign investors still suffer difficulties in terms of foreign ownership limits.
But what is foreign ownership limits?
To simplify, under Vietnam investment regulations, the trading volumes are limited for foreign investors, preferred as “foreign room” and thus appealing stocks are always out of “room” for investment which leads to the dissatisfaction of foreigners’ demand. Under recognition of the situation, Vietfund Management companies adapted Exchange-traded fund (ETF) - an advanced investment instrument - to deal with foreign ownership limits (FOL) (Robinson 2017). For example, if the “foreign room” for MWG (Mobile World Group) was full with no space for new foreign investors to enter, the emergence of ETF VFM Diamond – the basket of VN30’s stocks which includes MWG – would extent “foreign room” of MWG and provide foreigners the golden opportunities to hold more potential shares of MWG
“ETFs aren’t just having a moment. They’re creating a movement.”
- Martin Small
Since the commencement of ETF VFMVN30 in 2014, Exchange-traded funds have been a robust developing trend for equities investment and possessed the high possibility to become an advanced substitution for traditional stocks investment.
So what is ETF?
Similar to mutual funds, exchange-traded funds are baskets of collective securities e.g. stocks, bonds, foreign currencies or commodities with the main purpose of enhancing diversifications, reducing feasible risks of investments and simplifying investors’ market research. However, unlike mutual funds, ETF can be purchased and sold various times during a trading day through a brokerage firm on an exchange which led to the price flexibility of ETF. For the last 6 years, Stock Exchange market of Vietnam witnessed multiple IPOs of big and moderate ETFs e.g. VanEck Vectors Vietnam ETF (VNM ETF), FTSE Vietnam ETF, VFMVN30 ETF, iShares MSCI Frontier 100 ETF, KIM Kindex Vietnam VN30 ETF, etc. and most recently VFMVFN Diamond (Lien 2019).
ETFs are classified into 2 common types of investments:
Passive ETFs are collections of securities which simulate the performances of specific indices, industries, sectors, etc. To track the movement of a certain index, ETF tends to hold all of the securities or the representative stocks of that index (Schizas 2014). By fully replicating the index, fund managers of ETF are not required to actively modify the weighting of securities which minimizes commission fees for investors and hence, this type of investment is widely used in Vietnam e.g. VFMVN30 ETF, VFMVFN Diamond, etc.
While for Active ETFs, fund managers research and restructure the securities’ weighting frequently with the attempt to out-perform an underlying index (Schizas 2014). Nevertheless, active ETF is currently not applicable since it is way too complicated and expensive for stock market in Vietnam.