Vietnam Equities Poised for Influx of International Capital After FTSE Emerging II Upgrade

Vietnam's stock market has entered a new phase following FTSE Russell's official upgrade to Emerging Markets II. Effective September 21, Vietnam will be reclassified from a frontier market to the higher tier of Emerging Markets II. This reclassification sees 27 Vietnamese stocks, including large-cap VCB, VIC, and VHM; mid-cap BID, HPG, and VPB; and 21 small-cap stocks such as FPT, MSN, VNM, SSI, VRE, VIX, VCI, and VND, incorporated into the FTSE Global All Cap index. This inclusion means Vietnamese equities will now be part of indices used by numerous global funds for portfolio allocation, potentially leading to adjustments in investment distribution to Vietnam as fund capital flows. FTSE Russell will implement the integration of Vietnam into its global indices in four phases. The initial 10% weighting is set for September 2026, followed by gradual increases in March, June, and September 2027. MBS Research estimates that the first phase alone could generate approximately $180 million in net buying from ETFs, with total passive fund inflows related to the 27 stocks potentially reaching around $1.8 billion over the next year. Funds that benchmark against FTSE indices, such as the Vanguard FTSE Emerging Markets ETF (VWO) managing approximately $127.3 billion in net assets and tracking an index covering large, mid, and small-cap stocks in emerging markets, will now incorporate Vietnam as part of their global portfolios rather than requiring direct selection of the Vietnamese market. The Vanguard Total International Stock ETF (VXUS), with about $164.9 billion in assets, follows the FTSE Global All Cap ex US index, making Vietnamese stocks within the Global All Cap index now within its investment scope. Similarly, the Vanguard Total World Stock ETF (VT), with approximately $81.9 billion in net assets, tracks the FTSE Global All Cap Index, which covers over 98% of the investable equity market capitalization globally. On a smaller scale, the Vanguard FTSE All-World ex-US ETF (VEU) has around $70.4 billion in assets and focuses on large and mid-cap companies outside the US. The Schwab Emerging Markets Equity ETF (SCHE), with about $13.1 billion in assets, tracks the FTSE Emerging Index. The commonality among these funds is that investors do not need to specifically choose Vietnam to gain exposure to its equities. As the domestic market becomes a component of global indices, Vietnam will be integrated into the general capital allocation of these international portfolios. The combined net assets of VWO, VXUS, VT, VEU, and SCHE are approximately $458 billion, indicating the scale of assets operating under relevant FTSE indices, though the actual portion allocated to Vietnam remains a small percentage. In the initial phase, FTSE Russell expects Vietnam to constitute about 0.049% of the FTSE Emerging All Cap and 0.031% of the FTSE Emerging index. The allocation to individual stocks will also depend on their weighting within the index, fund size, and capital flows. Fund tracking methodologies also vary. Some funds may replicate the index almost entirely, while others might select representative stocks to closely match the benchmark's volatility. The new mechanism post-upgrade is the flow of capital. Previously appearing mainly in specialized Vietnam or frontier market products, Vietnamese stocks are now becoming part of global portfolios where capital can increase or decrease based on international investment activities. According to FTSE Russell's schedule, changes for September are implemented after the market closes on September 18 and become effective from the opening session on September 21. This marks Vietnam's official entry into the FTSE GEIS global stock index system as a secondary emerging market. This process will continue until September 2027, divided into four phases to allow funds time to adjust their portfolios. After each phase, FTSE Russell will assess funds' index tracking performance before proceeding with the next weighting increase.