More than 30 years after the fall of Saigon, the word “Vietnam” still evokes one of the most shameful chapters in recent American history. And Vietnam itself remains a country of contradictions. Lenin’s statue still stands tall in (North) Vietnam’s Hanoi, while the high-rises sprouting from (South) Vietnam’s Ho Chi Minh City (formerly Saigon) skyline are emblazoned with American brand names like Citibank and Sheraton. The trade accord signed between the United States and Vietnam in 2000, following a visit by then-president Clinton, was a huge shot in the arm to an otherwise moribund economy. Ironically, since the United States and Vietnam restored diplomatic ties in 1995, America has now become Vietnam’s largest customer, accounting for 20% of its exports. When these two former enemies argue today, it is more likely to be about tariffs and market access rather than war crimes or missing soldiers.

Understanding the investment opportunities in a rapidly developing market like Vietnam can help you pinpoint — and profit from — Asia’s rapid economic development and the emergence of the next BRIC economies.

Economic Reforms: Getting the Basics Right

Vietnam’s newfound prominence in Asia was highlighted last week, when it hosted Southeast Asian leaders as chair of the 10-nation trading bloc, ASEAN. Economic reforms introduced since the mid-1980s have turned this nation of 90 million — slightly larger than Germany — into an export champion. Since 1990, Vietnam’s exports have increased faster than China’s. Its GDP growth hit 8.4% in 2005, the second-highest growth in Asia, trailing only China. Vietnam joined the World Trade Organization (WTO) in 2006 and has free-trade agreements in place with a number of its Asian neighbors. Vietnam also recently announced the start of free-trade negotiations with the European Union that would help Vietnam lure European manufacturers away from China.

Vietnam has been particularly successful in attracting high-profile, foreign direct investment (FDI), drawing 13.5% of ASEAN’s FDI in 2008. Intel is launching a $1-billion facility in Ho Chi Minh City this year that will employ about 4,000 people, after tripling its initial commitment of $300 million. Korea’s Samsung, the world’s second-biggest maker of mobile phones, opened a $1-billion factory in Vietnam six months ago. Japan’s Toyota produced almost 50,000 cars there last year. A recent survey by the American Chamber of Commerce in Shanghai confirmed that Vietnam is perfectly placed to benefit from the rising backlash against foreign investors and soaring costs of doing business in China. With education and self-improvement rooted in the Confucian tradition, and more than 60% of the population younger than 30, Vietnam’s young, well-educated population of close to 90 million ensures that it will have an ample supply of the right kind of workforce.

For all of its economic achievements, Vietnam still has its share of problems. It rivals India in its lack of infrastructure. It is ranked as the second-most corrupt country in Asia after Indonesia. Although Vietnam’s economy expanded 5.2% last year, Vietnam was also hit hard by the “Great Recession.” The government spent more than $1 billion, over 1% of GDP, in 2009 to support its economy. Foreign direct investment fell by 70%. The government’s fiscal deficit hit 9% in 2009. After averaging 7% growth in the good years, exports fell almost 10% in 2009, and the country’s current account deficit soared. Pressured to make falling exports more competitive, the Central Bank devalued the Vietnamese currency twice in the last six months. There are rumors that the finance ministry may impose price controls on a range of essential goods to rein in Vietnam’s soaring inflation rate. Given the wide range of the country’s economic challenges, it was no surprise that Fitch Ratings placed Vietnam’s debt rating on a negative watch recently and that Vietnam fell in last year’s World Economic Forum’s most recent Global Competitiveness Report.

“Making Money in ‘Nam”

Foreign investors have had a tough time making money in Vietnam. Hanoi’s normalization of relations with the United States in the mid-1990s launched Vietnam’s first investment boom. Franklin Templeton and others set up dedicated Vietnam funds after the initial euphoria. But Templeton became disillusioned with Vietnamese graft and red tape, and quietly closed up shop within a few years. Sadly, longtime investors who stuck it out were not rewarded for their tenacity. One investor wound up his Vietnam Fund in 2004, 13 years after its launch, with early investors barely breaking even. The pioneer investors in Vietnam were indeed those who ended up with the arrows in their backs.

U.S. investors in Vietnamese public stocks have scarcely fared better. Since its launch in August of last year, Market Vectors Vietnam ETF (VNM) has been one of the worst performers on the planet.

Vietnam Market Vectors Fund versus the S&P 500

And because Vietnam is such a relatively undeveloped market, this ETF is not strictly a pure play on the country, as Vietnam represents only 67.9% of the index. Its holdings feature Singapore, 7.5%; the United Kingdom, 6%; and Malaysia, 5%. Canada, South Korea, India and Thailand make up the remaining third of the fund’s holdings.

The bottom line? Vietnam has terrific potential. And one day it will reward patient investors. But for now, there are better investment opportunities among the next BRIC Economies.