Play the Rising Yuan With Vietnam - TheStreet

Play the Rising Yuan With Vietnam

Market Vectors Vietnam is an ETF poised to benefit from stronger yuan thanks to proximity to China and labor costs below that of China.
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NEW YORK (TheStreet) -- Market Vectors Vietnam (VNM) - Get Report is an ETF poised to benefit from stronger yuan thanks to proximity to China and labor costs below that of China. Aside from a potential currency driven boost, the country is also following China's example of economic growth, making it a viable candidate for factories that may wish to relocate from China.

Manufacturing is becoming more expensive in China. Labor disputes have led to recent wage increases at some companies (

Honda

(HMC) - Get Report

,

Nissan

(NSANY)

and

Toyota

(TM) - Get Report

have all suffered strikes in the past week), and labor shortages in the southeast manufacturing region are persistent because of rising wage growth throughout the country. The millions of migrant workers who used to flood the region are staying home or finding better jobs elsewhere.

This is good news for Vietnam because the country has lower labor costs and a government that is pursuing the same policies as China, albeit about 10 to 15 years behind in terms of development.

Investors can gain exposure with an ETF,

Market Vectors Vietnam ETF

(VNM) - Get Report

. In terms of recent performance, the fund has gone up by 5.4% in the past month and 0.6% year to date, a tepid performance by itself, but respectable compared to the 3.8% decline in

iShares MSCI Emerging Markets

(EEM) - Get Report

this year.

Much of the fund's gains for the past month can be attributed to the increase of 4.2% that the ETF witnessed in the past week alone.

With labor costs and labor disputes already rising in China, now we can add the prospect of a rising currency. Last time the yuan appreciated, it appreciated versus the Vietnamese dong as well and that adds one more reason for a multinational in China to relocate some production to Vietnam.

China does have an ace up its sleeve for dealing with wage increases though. The more developed eastern provinces of the country are where industry has been rapidly expanding for almost two decades. Wages are now so comparatively high in the southeastern Chinese province of Guangdong that workers from places such as Vietnam, Sri Lanka and Pakistan can be found working illegally there.

Even if the country cracks down on illegal immigration, production can still be shifted to the interior of the country where wages are lower and unskilled labor is more plentiful.

Eventually though, prices in the interior of China will rise too, especially with the government taking measures to reduce the income gap between the rural poor and the comparatively rich Chinese urbanites. This means that in the long run, corporations will relocate and Vietnam may be the destination.

All is not rosy for Vietnam, however. Inflation at 9% is a concern and there is the question of whether Vietnam can provide the stability necessary to attract investment from multinational corporations.

The government is in the process of working to eliminate corruption and other annoyances that have frustrated foreign companies in the past, but time will only tell if these measures will take hold.

In the meantime though, the government is also taking more concrete measures to improve the country's trade prospects. Infrastructure is being improved in order to accommodate more trade, as ports, highways and sources of electricity are in the process of being expanded.

All in all, it's a risk to bet on Vietnam as the next destination as an export hub, but its prospects for competition with its neighboring countries in Asia appear to be improving and further improving the country's competitiveness is a major goal for the government.

For investors who are interested in getting on board, VNM is the only way to do so with an ETF, but it is also a fine option since its daily volume has roughly 100,000 shares. The fund charges a 0.76% management fee and currently has about $140 million in assets.

Don Dion is president and founder of

Dion Money Management

, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.