Sunday, June 4, 2023

Why Colombia ETFs May Continue to Rise

Colombia, a country once known for its political instability, guerilla wars, high crime rate and drug trafficking has now turned into an investor hotspot in Latin America.

The economy grew at 5.9% in 2011 and is projected to grow at 4.7% and 4.4% in 2012 and 2013 respectively (per IMF). GDP per capita has gone up more than 60% in the last ten years, backed by a surge in oil output and sound economic policies. Both imports and exports have quadrupled during the last decade. (Read: Latin America ETFs: Beyond Brazil)

The country is enjoying a huge oil boom, primarily due to critical reforms to its oil sector, such as partial privatization of state-owned oil company and allowing foreign companies to bid for licenses without having to partner with the state oil company. Crude production has almost doubled over the past few years. (Read Forget Argentina, Buy These Latin America ETFs Instead)

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Positive demographics further support the growth story. Colombia’s population is 47 million, of which half are below 30 years of age. (Read: Is ARGT A Better Latin America ETF Pick?).

Growing consumer demand in the country caused 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 and earlier this year. However the inflationary pressures have now started stabilizing.

Yesterday, the central bank left the rates unchanged at 5.25% for the second month in a row and extended a dollar-buying program aimed at containing the appreciation of the Colombian peso against the US dollar. Despite central bank’s dollar purchases, the peso is already up 9% against the dollar this year. Colombia stock market has also been rising to reach its highest level since March last year.

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 $16 billion this year, per government forecast.

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Among the negatives-unemployment rate at 10.8% is still among the highest in the region, though it has been coming down from more than 15%, about a decade ago. Apart from high unemployment, poor infrastructure, income inequality and drug trafficking remain the main challenges for the country.

The investors looking for exposure to Colombia have two ETF options, which we have analyzed below.

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 and has returned almost 200% to the investors since inception. Currently the fund has $174.0 million in net assets and 21 holdings. In terms of industry breakdown, material stocks have 26% weight, followed by financial services (21%) and energy (14%). The fund has returned 26.7% year-to-date.

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 financials have about 40% weight, followed by energy at 27% weight and materials at 14% weight. The fund has returned 20.3% year-to-date.

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Though COLX is slightly cheaper than GXG (3 basis points), it has much lower AUM and trading is very thin, resulting in higher trading costs. COLX is less concentrated in its top holdings but has a much higher exposure to the financial sector compared with GXG.

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