The rise of exchange traded funds (etfs) and their influence on vietnam s international capital markets

The number of ETFs in the country is currently 7 funds, with a total asset value of about 480 million USD (according to statistics of VNDIRECT Securities Company). In 2020, there are 5 domestic ETFs established, accounting for 70% of the total number of domestic ETFs operating in Vietnam. The new ETFs are based not only on market capitalization indexes (such as VN30 or VN100), but also on custom indices based on the real needs of existing investment funds, including VNDiamond, VNFinlead and VNFinselect…, with very special criteria. The most typical of these is the VFMVN Diamond Fund, with a portfolio of stocks that have run out of space for foreign investors. This is a new investment method for foreign investors to indirectly invest in Vietnamese stocks that have reached the ceiling of ownership limit (room). Although launched on May 20, 2020 with an asset value of only 4.5 million USD, the value of VFMVN Diamond has now increased 49.7 times to 224 million USD, becoming the second largest domestic ETF in the market. Vietnam market, after ETF VFMVN30. According to data from VNDRIECT Securities Company (VNDIRECT), in the first 11 months of 2020, foreign investors net sold 720 million USD of shares on the stock market of Vietnam. The net selling of foreign investors on the Vietnamese stock market was triggered by the net withdrawal of foreign money from emerging and frontier markets. The fact that many new ETFs were established in the first half of 2020, especially VFMVN Diamond (which focuses on investing in stocks that run out of room), has opened up an attractive investment channel for foreign investors who want to invest. into stocks with closed room, thereby opening up more foreign capital flows into Vietnams stock market.

FACULTY OF INTERNATIONAL ECONOMICS

***

MID TERM ASSIGNMENT

Module: International Finance

The Rise of Exchange-Traded Funds (ETFs) and their Influence on Vietnam's

International Capital Markets

Hanoi, March 2023

1 Introduction 2

1.1 Rationale and objectives of the study 2

1.2 Objects and scope 4

1.3 Structure of the study 5

2 Literature review 6

2.1 Exchange-Traded Funds (ETFs) 6

2.2 Vietnam's Current Position in International Capital Markets 9

2.3 Current ETFs in Vietnam 10

3 Evaluation of the possible impacts of ETFs 12

3.1 Possible impacts on Vietnam's International Capital Markets 12

3.2 Possible impacts on related fields 13

4 Practice of Vietnam's International Capital Markets toward effective environment 14

5 Recommendation 16

6 Conclusion 20

References 21

The number of ETFs in the country is currently 7 funds, with a total assetvalue of about 480 million USD (according to statistics of VNDIRECT SecuritiesCompany) In 2020, there are 5 domestic ETFs established, accounting for 70% ofthe total number of domestic ETFs operating in Vietnam The new ETFs are basednot only on market capitalization indexes (such as VN30 or VN100), but also oncustom indices based on the real needs of existing investment funds, includingVNDiamond, VNFinlead and VNFinselect…, with very special criteria The mosttypical of these is the VFMVN Diamond Fund, with a portfolio of stocks that haverun out of space for foreign investors This is a new investment method for foreigninvestors to indirectly invest in Vietnamese stocks that have reached the ceiling ofownership limit (room) Although launched on May 20, 2020 with an asset value ofonly 4.5 million USD, the value of VFMVN Diamond has now increased 49.7 times

to 224 million USD, becoming the second largest domestic ETF in the market.Vietnam market, after ETF VFMVN30

According to data from VNDRIECT Securities Company (VNDIRECT), inthe first 11 months of 2020, foreign investors net sold 720 million USD of shares onthe stock market of Vietnam The net selling of foreign investors on the Vietnamesestock market was triggered by the net withdrawal of foreign money from emergingand frontier markets The fact that many new ETFs were established in the first half

of 2020, especially VFMVN Diamond (which focuses on investing in stocks thatrun out of room), has opened up an attractive investment channel for foreigninvestors who want to invest into stocks with closed room, thereby opening upmore foreign capital flows into Vietnam's stock market

Recognizing the relationship between exchange-traded funds andinternational capital markets in Vietnam, we would like to choose the topic:

1 Introduction

1.1 Rationeale and objectives of the study

1.1.1 Rationeale of the study

Concept

ETF - short for the phrase Exchange Traded Fund, also known as traded fund An ETF is a basket of index-operated securities that represent a certainasset such as gold, commodities, stocks, commodity sectors, etc

exchange-An ETF is a combination of stocks and open-ended mutual funds If before,investors could only buy a single type of stock, now with an ETF they can buy awhole group of stocks in a certain sector ETF is considered a form of generalinvestment, creating diversity for the market

Investing in ETFs is when you are trading with pooled assets For example,

an ETF can have US stocks, and also include Chinese technology stocks, etc WithETFs, the fund's transaction costs are usually very low

For example, the E1 VFVN30 ETF is a passive investment fund that swaps aportfolio of the top 30 stocks on the Vietnamese stock market In a word: you justneed to put money into this fund to invest in the top 30 stocks on the Vietnamesestock market

History of ETFs

ETFs were established in the 1970s, but did not begin to be built until 1980.The first person who laid the foundation for the ETF was economist HarryMarkowitz His idea has attracted many investors However, the federal court inChicago (USA) ruled that ETFs function like futures contracts Because of this,ETFs are only allowed to operate in Canada and cannot be traded in the US

Only in 1993, ETFs were allowed to trade in the United States for thepurpose of tracking the S&P 500 index

During the two years from 1993 to 1995, Barclays Global Investors launchedother ETF products Especially the WEBS fund, many investors have easy access todomestic and foreign investment portfolios The fund was later renamed iShares7MSCI

In 1998, one by one, sector-specific ETFs were introduced US investorsgradually follow more indexes such as: S&P industry, S&P 500, S&P 400, MSCI,DJI9, NASDAQ 100.

In 2001, three ETFs that track the performance of the S&P 500, DJI, andNASDAQ 100 were listed on the NYSE

In 2004, the first US commodity ETF was launched, called Gold SPDR(GLD), allowing investors to trade gold

After 4 years, in 2008 the US Securities and Exchange Commission openedthe way for ETFs to operate

In 2010, a term ETF was announced Investors can hold the bonds and areallowed to mature in the same year

In 2015, a bond ETF was launched to investors

By 2019, ETFs listed in the United States reached $4 trillion Global bond ETFs (AUMs) have far exceeded the $1 trillion figure

Features of exchange-traded funds

An ETF has some of the following characteristics:

- Anyone can participate in the transaction including retail investors

- An ETF trades like an individual stock, so it is traded in real time duringany trading session

- The liquidity of the ETF depends on the index in the group BecauseETFs simulate the value of indexes in commodity groups, gold,commodities, etc., there will be ETFs with good liquidity and there areETFs with illiquidity

- The major ETFs on the market today, are all funds based on the typicalreference index S&P 500

- An ETF has both the characteristics of an investment fund and thecharacteristics of a stock listed and traded on most major stock exchanges

in the world The price of an ETF stock will change continuouslythroughout the trading day This is not the same as mutual funds, whichare not traded on an exchange

ETFs cost less than mutual fund stocks, so they are always an attractivechoice for individual investors.

An ETF can own hundreds or thousands of stocks in different industries, or itcan focus on a particular industry or sector

How ETFs Work

An ETF is a combination of a regular fund and a stock ETFs both have thecharacteristics and functions of a fund and act like a stock

ETF certificates in securities operate on the establishment of the securitiesportfolio of the founders The founders will set up capital, implement stockselection strategies so that the value of the certificates attracts investors Investorswill rely on mechanisms to choose the right certificate for themselves

Like a separate security code, ETF is traded to buy and sell continuouslyduring the day according to specific time frames The number of shares outstanding

in an ETF can change every day Because new shares are continuously created andexisting shares are repurchased, the aim is to keep the price of the ETF similar tothe underlying securities

Here, new investors play an extremely important role in maintaining liquidityand monitoring the integrity of the ETF through trading

1.1.2 Objectives of the study

The article aims to analyze the theoretical issues of the exchange-traded fund

- ETF At the same time, analyze and evaluate the reality of birth, situation andperformance of ETFs in the world as well as in Vietnam On that basis, the articleevaluates the positive and negative effects of ETFs on the international capitalmarket in Vietnam

1.2 Object and scope of the study

The object of the study is the exchange-traded fund (ETF) and theinternational capital market in Vietnam

Scope of the study:

- About space: In the world and in Vietnam

- About time: from the history of formation and development of traded fund (ETF) to the present time.

exchange-1.3 Structure of the study

The research paper has a structure of sections As follows:

1 Literature review

2 Evaluation of the possible impact of ETFs

3 Practice of Vietnam's International Capital Markets toward effectiveenvironment

4 Recommendation

5 Conclusion

Exchange-2.1.2 How ETFs function.

ETFs can track a particular index, sector, commodity or other assets, creating

a diverse collection of securities The ETFs can be purchased or sold on anexchange the way that a regular stock can

For example, the first ETF was the SPDR S&P 500 ETF, which tracks theS&P 500 Index

Creation of ETF shares:

Before investors can trade shares of an ETF on the market, the shares arefirst created through an arrangement between the ETF sponsor and a party known as

an authorized participant (AP) The AP is simply a large financial institution that

has the ability to create and redeem shares with the ETF provider

When an ETF sponsor decides to create a new fund, they purchase theunderlying securities and then exchanges them for a large block of ETF shares ofequal value

The AP sells those ETF shares to investors or market makers on anexchange Investors buy and sell ETF shares on the market from other investors, the

2.1.3 Types of ETFs

ETFs are generally characterized as either passively or actively managed.Passively managed ETFs aim to replicate the performance of a broader index, such

as the S&P 500 Actively managed ETFs have portfolio managers execute specifictrading strategies Active ETFs have more benefits over passive ETFs, but they arealso more expensive

- Index ETFs: Index ETFs are mostly passively managed, which attempt toreplicate the performance of a specific index Indexes may be based onthe values of stocks, bonds, commodities, or currencies

- Bond ETFs: Bond ETFs are used to provide regular income to investors.Their income distribution depends on the performance of underlyingbonds

- Stock ETFs: Stock (equity) ETFs comprise a basket of stocks to track asingle industry or sector They have low fees and do not involve actualownership of securities

- Commodity ETFs: commodity ETFs invest in commodities such asprecious metals, agricultural products, or hydrocarbons such aspetroleum

- Currency ETFs: currency ETFs enable investors to invest in or short anymajor currency or a basket of currencies

- Inverse ETFs: inverse ETFs are constructed by using various derivativesfor the purpose of profiting from a decline in the value of the underlyingbenchmark or index

- Leveraged ETFs: leveraged exchange-traded funds (LETFs or leveragedETFs) attempt to achieve daily returns that are a multiple of the returns ofthe corresponding index

2.1.4 Advantages of ETFs

Cost advantage: Because most ETFs are index funds, which follow a certain

preset basket of investments, the lack of active management allows for a lowerexpense ratio The cost advantages include, but are not limited to, portfoliomanagement fees, custody costs, administrative expenses, marketing expenses, anddistribution Over the long term, these cost differences can compound into anoticeable difference It is also worth noting that mutual funds often hold cash in

reserves to meet fund redemptions Because ETFs do not need to do this, all fundassets can be fully invested.

Taxation advantage: Unless the investment is sold, ETFs generally generate

no capital gains taxes, because they typically have low turnover of their portfoliosecurities ETFs also do not have to sell securities to meet investor redemptions.ETFs are not redeemed by investors; any investor who wants to liquidate generallywould sell the ETF shares on the secondary market, so investors generally onlyrealize capital gains when they sell their own shares for a gain

Trading advantage: ETFs can be bought and sold at current market prices at

any time during the trading day, unlike mutual funds and unit investment trusts, whichcan only be traded at the end of the trading day ETFs can be cheaply acquired,held, and disposed of Options, including put options and call options, can bewritten or purchased on most ETFs – which is not possible with mutual funds

Beside the mentioned advantages, ETFs also provide diversification, andtransparency As mentioned above, ETFs track multiple types of assets, whichdiversify portfolios; and ETF issuers are also required by regulators to publish thecompositions of their portfolios on their websites

2.1.5 Risks of ETFs

Tracking error: The ETF tracking error is the difference between the returns

of the ETF and its reference index or asset A non-zero tracking error thereforerepresents a failure to replicate the reference index The tracking error is computedbased on the prevailing price of the ETF and its reference Tracking errors are moresignificant when the ETF provider uses strategies other than full replication of theunderlying index This type of error is very rare for the most popular ETFs incurrent days, but they had existed during periods of drastic market fluctuations such

as the 2008 crisis

Liquidity risks: ETFs have a wide range of liquidity The most popular

ETFs are constantly traded The most active ETFs are very liquid, with high regulartrading volume and tight bid-ask spreads whose price fluctuates throughout the day.This also means ETF prices are vulnerable to fluctuations in the trading markets,causing the prices of ETFs to become unhinged from their underlying values

Risk of synthetic ETFs: synthetic ETFs, which do not own securities but

track indexes using derivatives and swaps, have raised concern due to lack oftransparency in products and increasing complexity; conflicts of interest; and lack

of regulatory compliance

Effects on price stability: Purchases and sales of commodities by ETFs can

significantly affect the price of such commodities

2.2 Vietnam’s current position in the international capital market

2.2.1 International capital market

A capital market is a financial market in which long-term debt (over a year)

or equity-backed securities are bought and sold Transactions on capital markets aregenerally managed by entities within the financial sector or the treasury departments

of governments and corporations, but some can be accessed directly by the public

International capital markets are the same mechanism but on the global scale,

in which governments, companies, and people borrow and invest across nationalboundaries

Capital market can be a primary or secondary market

In a primary market, the main entities seeking to raise long-term funds on theprimary capital markets are governments and business enterprises Governmentsissue only bonds, whereas companies often issue both equity and bonds The mainentities purchasing the bonds or stock include pension funds, hedge funds,sovereign wealth funds, and less commonly wealthy individuals and investmentbanks trading on their own behalf

In the secondary market, existing securities are sold and bought amonginvestors or traders, usually on an exchange, over-the-counter, or elsewhere

2.2.2 Vietnam’s current position in the international capital market

Small and limited 20 years ago, the Vietnamese capital market has grown toprovide a wide range of products Products and services are increasingly diversified

to meet the growing needs of investors and other participants Market institutionshave become more reliable at providing a safe and sustainable business environmentfor investors

The starting point for formatting capital markets in Vietnam was theestablishment of the SSC on 28 November 1996 Throughout its lifetime, the capitalmarkets experienced remarkable growth The country’s overall market size jumpedfrom less than 40% of GDP in 2011 to 104% of GDP as of June 2020.

Despite this rapid expansion, Vietnam’s stock market is still much smallerthan those in other Asian economies At the same time, the bond market in Vietnam

is dominated by government bonds because the corporate bond market is stillunderdeveloped

The capital markets in Vietnam have become important capital mobilizingand investment channels for Vietnamese firms and investors (both foreign anddomestic) More financial products and services are being introduced, creating moreinvestment, capital raising, and hedging instruments for market participants andinvestors

However, various challenges also exist First, the size of Vietnam’s stock andbond markets is still small in comparison with those of its peers in the region.Though it is being expanded, the range of products and services is still limitedcompared to other regions, making the market less attractive to investors Because

of that, the investor base is quite limited Only approximately 3% of the population

is active in the stock market, and most of them are individuals rather thaninstitutions

2.3 ETFs in Vietnam

Following the global trend, the number of ETFs in Vietnam, includingforeign ETFs and domestic ETFs has had a remarkable increase in the last 10 years

FTSE Vietnam ETF and V.N.M ETF are the first two foreign ETFs to invest

in Vietnam’s securities market, established in 2008 and 2009 respectively TheFTSE Vietnam ETF had the initial asset value of 5.1 million USD and V.N.M ETFhad 14 million USD Until the end of 2020, the total value of FTSE Vietnam ETFreached 273 million USD, and V.N.M ETF reached 457 million USD

The first domestic ETF established in Vietnam was created in 2014 isVFMVN30 with the initial asset value being 9 million USD, and increased to 322million USD in 2020

In 2020, five more domestic ETFs were established, accounting for 70% ofcurrently active domestic ETFs in Vietnam This attracts more foreign investors,