Will The Vietnam ETF (VNM) Get A Boost From Chinese Labor Troubles?

by on June 24, 2010 | ETFs Mentioned:

A recent wave of strikes and suicides across numerous manufacturing centers in China has brought increased scrutiny to the Chinese labor force. Makers of many well-known products have been forced to sharply increase wages and improve working conditions in order to placate the migrant workers in China who moved from impoverished rural areas to the coast of China in search of a better life. Long assumed to be a never-ending stream of workers willing to work for rates unimaginable in the developed world, workers are now demanding higher wages to compensate for increased cost of living in the country’s urban areas. That has led to labor shortfalls in many areas, as the supply of low-wage employees has dwindled. An American industry association found that 88% of its members were experiencing a labor shortage in China, and almost as many had experienced late deliveries as a result. These factors have led to wage increases of at least 20% in many factories; some analysts are forecasting that this trend will extend into the summer as other manufactures match the increases in order to keep workers on board [also see Beyond The BRIC: Ten Country-Specific Emerging Market ETFs].

The era of cheap Chinese labor appears to be nearing an end, and many believe that in order to keep costs down companies will look to move their operations to even cheaper countries such as Vietnam, where citizens on average make about one-third as much as their Chinese counterparts. While this would likely to be welcome news for unemployed Vietnamese, it is unlikely to directly benefit the main ETF tracking the country, the Market Vectors Vietnam ETF (VNM).

Like many international ETFs, VNM is dominated by holdings in the financials and energy sectors, which account for almost 70% of assets in aggregate. These areas of the economy seem to be unlikely to benefit directly from a shift of Chinese manufacturing to the country, although a drop in unemployment and increase in GDP could trickle throughout the Vietnamese economy [see more holdings of VNM here].

So while the fortunes of Vietnam could benefit in the long-run from manufacturers jumping to its lower cost cities, the ETF is unlikely to follow suit immediately due to its heavy emphasis on financials and energy firms. VNM has underperformed the most popular fund tracking the Chinese market, the iShares FTSE/Xinhua China 25 Index Fund (FXI), by a relatively wide margin over the last year. However, VNM has performed much better as of late, outgaining FXI thus far in 2010 by posting a loss of 0.5% compared to a loss of 3.7% for the popular China ETF [see more fundamentals of FXI here].

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Disclosure: No positions at time of writing.