Best Latin America ETFs for 2013: Colombia

Impressive social and economic turnaround. Colombia, which was once known for its political instability, guerilla wars, high crime rate and drug trafficking has now turned into foreign investors’ favorite destination in Latin America.

The economy has performed well for several years in a row, fueled by a record level of foreign investment into its oil and coal sectors. The economy grew at 5.9% in 2011 and is projected to grow at 4.3% and 4.4% in 2012 and 2013 respectively (per IMF). GDP per capita has gone up more than 60% in the last ten years. Both imports and exports have quadrupled during the last decade.

All three top rating agencies now have “investment grade” rating on Colombia; due to its improved security conditions and ability to deal with external shocks.

As a result of improved investment environment, Colombia attracted foreign investment of $13.2 billion last year, which may go up to $17 billion this year, per government forecast. (Read: Forget US REITs, China Real Estate ETF is Booming)

Positive demographics further support the growth story. Colombia’s population is 47 million, with a median age of 28 years.

Oil boom resulting from critical reforms
The country is enjoying a huge oil boom, primarily due to critical reforms to its oil sector. In order to attract foreign investment the government issued licenses for oil exploration in large areas of the country and allowed foreign companies to bid for licenses without having to partner with the state oil company, which was also partially privatized.

As a result, foreign investment in oil industry surged to $4.3 billion in 2011.  Crude production has almost doubled since 2006. (Read:Time to Stuff the Turkey ETF into Your Portfolio?)

Stable Macroeconomic Policy, Strong Currency
Colombia’s remarkable economic performance has also been driven by its strong macroeconomic policy framework and a flexible exchange rate regime. Growing consumer demand in the country had resulted in a rise in inflation to well above the midpoint of the central bank’s target range (though among the lowest in the region), leading to rate hikes, last year as well as earlier this year. However the inflationary pressures have now started stabilizing and inflation currently is just a little above 3%.

Country’s key exports of oil, coffee and coal Industrial production have suffered of late due to global slowdown and strong appreciation of the currency. (Read: A technical look at the Japanese ETF)

Last month, the central bank cut the key interest rate to 4.5% in order to address the industrial contraction.  Earlier in September, the central bank increased its dollar-.buying program aimed at containing the appreciation of the Colombian peso against the US dollar (at least $20 million a day in the foreign exchange spot market) by $3 billion.

The purchases are aimed at preventing excessive strength in the peso, which is up about 8% against the dollar this year, making it one of the strongest currencies in the world. Colombia has so far not adopted any capital controls in order to limit the appreciation of its currency. (Read: Escape the Cliff with These Dividend ETFs)

Unemployment rate at about 10% is still among the highest in the region, though it has been coming down from more than 15%, about a decade ago.

Poor infrastructure, income inequality and drug related violence remain the main challenges for the country.

Further, the economy is very much dependent on the performance of rather volatile oil and mining sectors.

Global X FTSE Colombia 20 ETF (GXG)
Designed to track the FTSE Colombia 20T Index, GXG made its debut in February 2009. The index is a market capitalization weighted index of 20 most liquid stocks in the Colombian market. The fund charges 78 basis points annually for expenses. Currently the fund has $179 million in net assets and 23 holdings. In terms of industry breakdown, material stocks have 18% weight, followed by financial services (17%) and energy (17%).

Market Vectors Colombia ETF (COLX)
COLX seeks to track the Market Vectors Columbic Index, which provides exposure to publicly traded companies that are domiciled and primarily listed in Colombia or derive at least 50% of their revenues from Colombia. The fund was launched in March last year and charges 75 basis points in expenses. The ETF currently holds 28 securities. In terms of sector exposure energy have about 24% weight, followed by banks with 22% weight.

Source: YAHOO Finance


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