“One of the most impressive emerging market growth stories over the past several years has been Colombia; a country of 46 million people that has aggressively pursued pro-market reforms by reducing regulation, eliminating trade barriers and promoting foreign investment. Colombia has become a critical exporter of natural resources including oil, gold, coal, and coffee, all while continuing to develop trade partnerships with major consumers such as the U.S. and China“, according to the Global X research.
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Name: Global X MSCI Colombia ETF
Symbol: GXG
Role in Portfolio
This exchange traded fund (ETF) provides equity exposure to Colombia which is the fourth largest economy in Latin America. The product offers risky single country emerging market equity exposure and should be deployed as tactical tool within a diversified portfolio. As an example the iShares MSCI Emerging Markets ETF (EEM) allocates 1.04 percent towards the country while the iShares Latin America 40 ETF (ILF) 3.13 percent. Therefore, before considering an investment, investors should review their portfolio for existing exposure to the Colombian stock market through their existing holdings in order to avoid unintentionally over weighting this region.
Generally investors should be aware that the MSCI All Colombia Capped Index is is heavily biased towards financials (about 40%).
The financial sector has grown favorably due to good liquidity in the economy, the growth of credit and in general to the positive performance of the Colombian economy. The Colombian Stock Exchange through the Latin American Integrated Market (MILA) offers a regional market to trade equities. Colombia is also the best place for doing business in Latin America according to the World Bank.
The GXG ETF provides diversification benefits to some extend, depending on the underlying index, when added to an equity strategy following the statistics presented by Global X.
The GXG ETF should be used as a satellite position within a global world or a global emerging markets or a more local EM strategy strategy. Investors should always check the allocation of the country within their underlying benchmark in order to play it on a tactical basis.
Economy – Fundamental Insight
Colombia is an upper middle-income economy, and Latin America’s fourth largest. Petroleum is Colombia’s main export, making over 50% of Colombia’s exports. Manufacturing makes up nearly 12% of Colombia’s exports, and grows at a rate of over 10% a year. Colombia has the fastest growing information technology industry in the world and has longest fibre optic network in Latin America. Colombia also has one of the largest shipbuilding industries in the world.
Colombia is rich in natural resources, and its main exports include mineral fuels, oils, distillation products, precious stones, forest products, pulp and paper, coffee, meat, cereals and vegetable oils, cotton, oilseed, sugars and sugar confectionery, fruit and other agricultural products, food processing, processed fish products, beverages, machinery, electronics, military products, aircraft, ships, motor vehicles, metal products, ferro-alloys, home and office material, chemicals and health related products, petrochemicals, agrochemicals, inorganic salts and acids, perfumery and cosmetics, medicaments, plastics, animal fibers, textile and fabrics, clothing and footwear, leather, construction equipment and materials, cement, software, among others.
Graphical depiction of Colombia’s product exports in 28 color-coded categories. Source: Wikipedia.
Colombia’s economy experienced rapid increase despite a serious armed conflict. The economy continues to grow in part because of austere government budgets, focused efforts to reduce public debt levels, an export-oriented growth strategy and an improved security situation in the country. However, the recent plummeting oil prices have not been playing in Colombia’s favor. Here are the selected macroeconomic indicators for the period of time between 2002 and 2011.
Colombia – Macroeconomic Indicators 2002-2011 (Source: Wikipedia)
Here are some economy related statistics:
- Total government expenditures account for 28.3 percent of the domestic economy.
- Public debt equals 32 percent of gross domestic product.
- A strong fiscal climate was reaffirmed by a boost in bond ratings.
- Annual inflation closed 2014 at 3.66% YoY (vs. 1.94% YoY in 2013).
- The average national unemployment rate in 2014 was 9.1%, although the informality is the biggest problem facing the labour market (the income of formal workers climbed 24.8% in 5 years while labor incomes of informal workers rose only 9%).
- Colombia has Free Trade Zone (FTZ), such as Zona Franca del Pacifico, located in the Valle del Cauca, one of the most striking areas for foreign investment.
Index/ETF Construction
The Global X MSCI Colombia ETF seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the MSCI All Colombia Capped Index. The GXG ETF was $63.1 million in size as of 24-Feb-2015. The portfolio is concentrated with 30 holdings as of 24-Feb-2015.
The top holding of the GXG ETF constitutes around 21 percent of the portfolio while the top 2 allocations account for about 37 percent.
GXG Top 10 Holdings. Source: Global X
On the sector level the financials account for almost 40 percent of the ETF whilst the top 3 sectors: financials, energy and utilities constitute 73.2 percent of the portfolio.
GXG Industry Breakdown – Source: Global X
Technical Charts
As mentioned above, Colombia is rich in natural resources and petroleum is Colombia’s main export. The recent plummeting oil prices dragged the GXG ETF down on both absolute and relative basis vs. the broad Latin America and global Emerging Markets indices.
GXG 3 Years Performance Chart – Source: StockCharts
GXG vs. ILF Ratio 3 Years Performance Chart – Source: StockCharts
GXG vs. EEM Ratio 3 Years Performance Chart – Source: StockCharts
The crashing oil prices have started already affecting Latin America economies including Colombia.
Fees
This fund levies a 0.61% expense ratio.
Alternatives
iShares MSCI Colombia Capped ETF (ICOL) is a slightly better diversified fund that GXG with 33 underlying companies. It charges an expense ratio at the same level as GXG (0.61%). On the sector level the ETF offers very similar sector split to GXG, with the following top three sector allocations: financials (39.14%), energy (19.88%) and utilities (14.88%) as of 24-Feb-15. However, on the security level, the top allocation constitutes 9.1 percent of the fund, opposite to GXG’s almost 21 percent.
More Analyst Reports from this series:
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Important Information Related to this Article
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