Most emerging market stock indexes have been posting relatively tepid growth in recent months, as talk of Federal Reserve tapering has lured more investor dollars home. So far this year, the iShares MSCI Emerging Markets Index (NYSE: EEM) has fallen 7.4 percent versus an 18.8 percent gain for the Dow Jones Industrial Index, as investors worry that a slowing of Fed stimulus will reduce investment flows into the emerging market regions.

But so far this year, the iShares MSCI Frontier 100 (NYSE: FM), a fund that tracks countries ranked one step below emerging markets on the development index, has returned nearly 20 percent.

As the global economy continues to improve, growth in those frontier market nations has been picking back up, following a steep drop off in the global recession years, which saw average gross domestic product (GDP) growth fall from an average of 9 percent to less than 5 percent.

Most frontier market nations were also impacted by heavy investment flows related to the Fed’s stimulus efforts, as most of that hot money found its way into the economies of their emerging market peers. As a result, while EM nations will be negatively impacted by a reversal of those flows, the frontier markets will be unaffected.

Vietnam is a particularly attractive frontier market country.

Vietnam has a strong demographic profile, with more than 60 percent of its 86 million people under the age of 35 and in their prime working years. The country also has a relatively modern and stable infrastructure, with more than 90 percent of the country enjoying access to electricity, compared to just 30 percent of Myanmar. Overall, Vietnam ranks 53rd out of 155 countries in the World Bank’s Logistics Performance Index.

With labor costs steadily rising in China—the average unskilled Chinese worker now makes about $300 per month—manufacturers have been scouring Asia for new sources of inexpensive labor. In Vietnam, the average laborer earns only one-third to one-half the average Chinese wage.

That has attracted export-focused manufacturers such as Bridgestone (Tokyo: 5108, OTC: BRDCY), the world’s largest tire maker, which has spent more than $1.2 billion in a manufacturing facility in the northern port city of Haiphong. In 2011, 208 Japanese companies alone established operations in Vietnam.

Consumer electronics companies such as Samsung (Seoul: 5930) and Panasonic (Tokyo: 6752) are also being lured by the country’s relatively young, well-educated workforce. More than 93 percent of the population is literate and 92 percent of primary school-age children are enrolled in school.

And while the country’s corporate tax rate is already a relatively low 25 percent, the government has been offering aggressive tax breaks to attract new businesses to the country. Samsung, for instance, currently pays just 10 percent in corporate taxes in Vietnam.

That has driven strong economic growth in the country, which was languishing in the wake of the global recession. Prior to 2008, the country’s gross domestic product (GDP) had been growing by more than 8 percent annually but fell to less than 5 percent. But in the first nine-months of 2013, GDP has grown by 5.1 percent, up from 4.9 percent in the first half of the year, and is expected to hit 5.4 percent for the full year and 5.8 percent in 2014.

So while there was almost no foreign investment in Vietnam just a decade ago, according to the US Department of State foreign direct investment in the country has average about $10 billion per year over the last five years. In the first ten months of 2013, foreign direct investment totaled $13.1 billion, a year-over-year increase of more than 95 percent. Exports from the country have also risen dramatically, up 17 percent for the year as of October.
Purchases of Vietnamese equities by foreigners has also been running at their fastest pace since 2008, as the economy recovers and inflation remains relatively tepid. As a result, many companies have been reaching the 49 percent foreign investment cap placed on most Vietnamese companies by the government, a limit that has been in place since 2009. But that shows signs of soon changing.

Vietnam’s Communist Party has been revising the country’s constitution and, according to a draft released in November, restrictions on the country’s private sector will be easing, though the state will maintain much of its control over the economy. The Vietnamese Finance Ministry has also proposed increasing the foreign ownership cap to 60 percent of voting shares in some industries, while also allowing foreigners to purchase up to 100 percent of non-voting shares.

Higher foreign investment caps will provide a significant upside catalyst to Vietnamese equities along with the country’s return to growth.

The government has also been moving to clean up the balance sheets of Vietnamese banks which, like most of their peers around the world, ran into trouble with bad debt. As a result, while bad debts accounted for 4.64 percent of total bank loans at the end of August (up from 4.58 percent in July), the rate of bad debt growth has been slowing. After increasing an average of 3.91 percent last year, bad debt at Vietnamese banks has been rising by an average of 2.2 percent in the first nine-months of this year, as banks have tightened lending standards.

The country’s central bank has also directed its sovereign wealth fund of sorts, known as the Vietnam Asset Management Company, to buy up bad Vietnamese debts of between VND30 trillion to VND35 trilling by year’s end. As of the latest report released in November, about VND18.4 trillion has already been purchased, so banks should see substantial improvement in the balance sheets in the fourth quarter, another potential upside catalyst.

While Vietnam is an extremely attractive market for 2014, it is a relatively difficult one for retail investors to access. But Market Vectors Vietnam ETF (NYSE: VNM) is an easy way to tap into Vietnam’s attractive growth prospects while enjoying broad diversification.

Almost 38 percent of the exchange-traded fund’s $385.9 million in assets is devoted to Vietnam’s financial sector, where earnings have been improving on a year-over-year basis largely thanks to slowing bad debt growth.

The Commercial Bank for Foreign Trade of Vietnam [Ho Chi Min City Stock Exchange (XSTC): VCB], more commonly known as Vietcombank and the fund’s largest bank holding, has experienced solid high single-digits earnings growth for much of the year, as it plays a leading role in the country’s international payments system with a 17 percent market share. It is also the only bank in the country to offer six major global credit cards, leading the country in card issuance and volumes.

Another 22.6 percent of assets are devoted to the country’s growing energy sector such as Petrovietnam Drilling and Well Services (XSTC: PVD), which has generated revenue of VND10.4 trillion (USD490.5 million) and profit of VND1.48 trillion (USD69.8 million). The company forecasts full-year profit to come in at VND1.8 trillion (USD84.9 million), beating its initial full-year forecast by more than 32 percent as the country’s economy continues to improve and new industrial companies move in, boosting energy demand.

The remainder of the fund’s assets is spread across smaller allocations of less than 10 percent to consumer stocks, utilities and materials companies.

The fund is relatively inexpensive given its geographic focus, with an expense ratio of just 0.76 percent, though it’s somewhat volatile. Its standard deviation averages better than 26.3, though it is less than the average broad-based frontier market fund.

Vietnam is benefiting from raising labor costs in China as well as its own improving economic fundamentals, making Market Vectors Vietnam ETF the newest addition to our portfolio as a buy up to 25.