Good Morning, Vietnam! That’s been the message from investors this year, who have piled into the country’s booming equity market. Vietnam has long been recognised as a country with huge potential, but for the past three years the Asean member has largely been out of favour with investors. Not so this year. The FTSE Vietnam Index and Market Vectors Vietnam Index are both up more than 17% year-to-date (YTD).

Vietnam ETFs have posted strong returns year-to-date as the Vietnamese government has unveiled measures to address non-performing loans and stimulate investment.

The impressive performance of these indices means the db X-trackers FTSE Vietnam UCITS ETF (XFVT) and Market Vectors Vietnam ETF (VNM), which are linked to these indices, are among the best performing exchange-traded funds (ETFs) of the year so far.

A number of factors are behind the surge in Vietnamese stocks, but growing investor confidence, fuelled by renewed government action to address high levels of bad debt in the banking system and stimulate investment, is foremost among these.

Perhaps the most significant recent development is the formation of a national asset management company mandated to purchase non-performing loans from banks. Over the past few years, Vietnamese banks have been weighed down by bad debt after the government encouraged a lending spree in an attempt to ride out the global financial crisis. The new national asset management company, which will be managed by the country’s central bank, will issue bonds to finance the acquisition of some of this debt, which, in turn, should help clean up banks’ balance sheets and encourage new lending to bolster the economy.

Other developments include the widening of the trading band for stocks on the Ho Chi Minh City Stock Exchange, the country’s main stock market, to 7% from 5%, and news that the government is considering lifting the ceiling of foreign ownership in Vietnamese companies in an effort to make the country more attractive to foreign investors. Foreign ownership of Vietnamese firms is currently capped at 30% for banks and 49% for other companies, which has stunted foreign investment.

The combination of these measures, which have boosted confidence in the government’s commitment to pro-market reform, has allowed investors to once again focus on the long-term potential of Vietnam. This potential, long understood by investors, is underpinned by: attractive demographics (approximately half of the country’s 88 million inhabitants are under the age of 25), rising disposable incomes, a competitive manufacturing base, relatively stable politics, and the country’s proximity to China.

Another factor making Vietnamese stocks appealing right now is valuation. The market currently trades at around 11.5 times projected 2013 earnings, which is cheaper than its peers in the region as well as its own historical levels. The market has previously traded between 8 and 35 times earnings.

Investors looking for dedicated exposure to Vietnam are well served by the two ETFs mentioned above. The db X-trackers fund is listed on multiple exchanges including the London Stock Exchange, Deutsche Börse, Euronext Paris, Borsa Italiana, Stockholm Stock Exchange, SIX Swiss Exchange, Hong Kong Stock Exchange and Singapore SGX-ST, and comes with an expense ratio of 0.85%, while the Market Vectors fund is listed on the NYSE Arca and comes with an expense ratio of 0.76%.

Both funds do a good job of delivering targeted access to Vietnamese stocks, though their approaches and holdings differ slightly. The db X-trackers fund is linked to the FTSE Vietnam Index and tracks the performance of Vietnamese companies traded on the Ho Chi Minh Stock Exchange that satisfy certain investability criteria and have sufficient foreign ownership availability. By contrast, the Market Vectors fund, which is linked to the Market Vectors Vietnam Index, expands on this local exposure to include offshore companies that generate at least 50% of their revenues in Vietnam. Consequently, it also holds companies that are listed on UK, Thai, Malaysian and Indian stock exchanges.

By adding non-Vietnamese-listed stocks to the mix, the Market Vectors fund is slightly more diversified with 31 holdings versus 22 for the db X-trackers fund. The top ten holdings of the Market Vectors fund add up to 57.8% of the entire fund compared to 80.4% for the db X-trackers fund. Both have significant exposure to Financials, Energy and Industrials, representing a combined 75.4% and 90.4% for the Market Vectors and db X-trackers funds, respectively.

The top five holdings for the Market Vectors fund are Bank for Foreign Trade (Vietcombank), Baoviet Holdings, Vincom, Petrovietnam Fertilizer & Chemical and Saigon Thuong Tin Commercial, while the top five for db X-trackers fund are Masan Group, Vincom, Petrovietnam Fertilizer & Chemical, HAGL and Bank for Foreign Trade (Vietcombank).

(Thanh Luong contributed to this article.)