FM - VNM: A Concentrated Frontier-Markets Fund Low PEG Weakening Momentum

2023-10-25 12:45:45 ET

Summary

• Frontier Markets, including the VanEck Vietnam ETF, have underperformed the S&P 500 over the past decade.
• VNM has a high concentration in two sectors, and has recently experienced weak relative performance.
• Despite a low valuation and bullish seasonal trends, the risks and performance of VNM make it a hold-rated ETF.
• I highlight key price levels on the chart to monitor into year-end.

Frontier Markets have been a serial underperforming area of the global stock market over the last decade. The iShares MSCI Frontier 100 ETF (FM) sometimes catches attention when risk-on environments come about, but in general, the fund has lagged the S&P 500 over many timeframes. Its biggest country weight, by far, is Vietnam. That nation’s equities actually rebounded sharply earlier this year, outpacing the SPX at times.

I have a hold rating on the VanEck Vietnam ETF (VNM), however. I assert that its valuation is compelling, but a concentrated portfolio and weak relative performance lately offset the low PEG ratio and bullish seasonal trends about to ensue.

Frontier Markets: Keeping Pace with the SPX YoY, VNM +15%

Frontier Market ETFs: Vietnam A 31% Weight

According to the issuer , VNM seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MarketVector Vietnam Local Index, which tracks securities of publicly traded companies that are locally incorporated in Vietnam. VanEck notes that Vietnam is among the world's most populous nations where 58% of the population is working age with an average age of 32 and that VNM is the largest and most liquid U.S. ETF offering exposure to Vietnamese companies, providing a convenient way to customize international exposure.

VNM is a small ETF with just $530 million in assets under management as of October 24, 2023. In terms of expenses, the 0.66% annual expense ratio is on the high side. Income investors may shy away from the fund considering that its trailing 12-month dividend yield is just 0.85%. Liquidity is decent in my view – average volume is more than 700,000 shares on this low-priced ETF and the 30-day median bid/ask spread is just seven basis points. Still, it is prudent to use limit orders during the trading day to help avoid bad fills. In terms of price action, recent momentum has turned weaker after being strong from late Q2 through Q3. Finally, risk is high with VNM since its standard deviation is more than 31% and tracking error has been high over the past several years.

Digging into the portfolio, data from Morningstar show that the allocation is spread across the style box. Significant small and mid-cap stock exposure also adds to potential volatility. Still, the fund features a low price-to-earnings ratio of under 12 while its value-oriented portfolio has below-average earnings quality. With a long-term earnings growth rate of nearly 12, the PEG ratio is attractive near 1. Of course, there is currency exposure risk with VNM given that its holdings are priced in the Vietnamese Dong.

VNM: Portfolio & Factor Profiles

Making the ETF somewhat risky is that it's concentrated. The top 10 holdings comprise more than half of the allocation while two sectors – Financials and Real Estate – also house a majority of VNM’s positions. There is no tech exposure, so there is a high chance that VNM will differ significantly from the performance of the S&P 500 given the sector weight differences.

VNM: Portfolio Breakdown & Dividend Information

Seasonally, VNM tends to base from late Q3 through November, leading to rallies, on average, from mid-December through February of the following year, according to data from Equity Clock . Like many frontier market country funds over the past decade-plus, returns have been poor on a relative and absolute basis, but we are near a bullish stretch on the calendar.

VNM: A Bullish Seasonal Turn Starting in Mid-November

The Technical Take

VNM peaked in early 2022 like the S&P 500. Shares went on to plunge far more than the US large-cap index, however. A more than 50% drawdown off the January 2022 peak did not reach its climax until November last year. From there, a gradual uptrend took place, but shares petered out last quarter after a 43% recovery. Notice in the chart below that the September high came on weaker RSI momentum – a “negative divergence” in technical analysis parlance.

Still, I do see an uptrend support line from the low nearly a year ago, but I caution investors that diagonal trendlines can be less reliable than horizontal ones. What’s helpful for the bulls is that there is a high amount of volume by price in the $11 to $13 zone – there was tremendous volume from Q4 last year through this past March. So, I would expect natural buyers to step up in that zone. They have done that thus far, but with the 200-day moving average turning flat after a period of moving higher, the uptrend is on thin ice. Longer-term, I see resistance just under the $16 mark.

Overall, the technical situation is neutral.

VNM: Uptrend On Soft Footing, $15-$16 Resistance

The Bottom Line

I have a hold rating on VNM. The valuation is low, but it is a risky and concentrated fund with an unimpressive chart and somewhat high expense ratio.

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