The Colombia ETF’s Secret Sauce

by on August 12, 2010 | ETFs Mentioned:

Over the past few weeks, many emerging and developed markets have trended sideways or even fallen as continued concerns over global growth have plagued stocks around the world. Almost no geographic region has been immune to this doom and gloom, with markets falling everywhere from Britain to Brazil and every country in between. As more and more economies seem perilously close to sinking into a double dip recession, investors are frantically seeking out those that have managed to sidestep the recent chaos, heading higher even as the rest of the world retreats in the face of stiff economic headwinds. One such market lies in South America, but it isn’t the continent’s powerhouse (Brazil) or the resource rich nations of Peru or Chile. Among the best single-country ETF performers year-to-date is the only fund offering exposure to the Colombian equity market: the Global X/InterBolsa FTSE Colombia 20 ETF (GXG).

Although the country remains overshadowed by its larger South American counterpart in Brazil, Colombia’s stock market has been on a rampage as of late; the index underlying GXG has surged by more than 35% so far in 2010 and a whopping 55% over the past 52 weeks. By comparison, the largest ETF offering exposure to Brazilian stocks, the iShares MSCI Brazil Index Fund (EWZ), has sunk by almost 10% so far in 2010 and is up only about 15% over the past 52 weeks. So despite Brazil’s reputation as one of the up-and-coming BRIC countries and staple of emerging market portfolios, its market has lagged far behind South America’s most impressive economy over the last year.

Much of the credit for Colombia’s emergence as a thriving economy is due to Alvaro Uribe, who recently stepped aside as president after Colombia’s Constitutional Court denied the possibility of seeking a third term. Since his inauguration in 2002, Uribe waged an aggressive campaign against the Revolutionary Armed Forces of Colombia (FARC). By some estimates, the paramilitary group controlled half of the country when Uribe took office; today, the government is completely in control. That has opened up Colombia to international investment, and the decline in violence and fear has allowed local consumption to thrive as well.

Interbolsa SA, Colombia’s largest brokerage firm, now expects GDP to have expanded by 5.1% in the second quarter, higher than the central bank’s official 4.9% guess. That impressive expansion is due to a number of factors. “Investment in the mining industry was $4 billion in the first half of the year, and relatively high prices for Colombia’s key commodities like oil, coal and gold will continue to boost growth in that sector, which accounts for 13% of gross domestic product,” writes Darcy Crowe. “Retail is also growing at a faster pace than initially expected, Interbolsa said, citing an 8.1% increase in consumer credit in June and higher consumer confidence data.”

Unlike many developing economies, Colombia has inflation under control. The 12-month-running inflation rate stands at just over 2%, within the low end of the central bank’s target range. That has made economists optimistic that the country will be able to maintain low interest rates for the foreseeable future (the benchmark lending rate is currently around 3%).

Below, we take a look at this surging Latin American economy’s ETF in more detail to see how GXG has managed to distance itself from its emerging market peers [see all the ETFs that offer exposure to Colombia with our new Country Exposure Tool].

GXG Under The Microscope

GXG tracks the FTSE Colombia 20 Index, a market capitalization-weighted index of the 20 most liquid stocks in the Colombian market. Currently, this benchmark has heavy weightings in two sectors; financials (34.3%) and energy (29.1%) account for big portions of GXG’s assets, while no allocations are made to the technology, media, and health care sectors. Furthermore, the fund offers a high level of exposure to medium cap securities which is generally rare for country-specific ETFs; GXG allocates just one-quarter of its total assets to non-mid cap securities [also read ETFs For The Six Markets Above 2007 Highs].

Top Holdings, Top Performers

In terms of individual allocations, three companies dominate the holdings of GXG; Ecopetrol (20.3%), BanColombia (19.9%), and Pacific Rubiales Energy (8.7%). All three have posted significant gains in 2010 with Ecopetrol, the fund’s top holding, up an incredible 52%; that accounts for roughly one-third of the fund’s gains on the year. The other top holdings have outperformed as well; BanColombia is up about 20% so far in 2010 and has nearly doubled over the past 52 weeks, while Pacific Rubiales Energy has increased its price by more than 100% since the start of the year. With such impressive performances from the primary constituents, GXG’s impressive rally is a bit easier to explain [also see the Three Best Performing Country ETFs From The First Half Of The Year].

Investors are starting to take note of GXG’s stellar performance. For some time after its inception in February 2009, GXG struggled to gain traction; as recently as June of 2010 assets stood at just $13 million. But a recent surge in interest has pushed GXG’s assets close to $50 million over the last two months. Trading volumes now regularly top 50,000 shares daily; it would seem that Latin America’s best kept secret may be getting out.

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Disclosure: Eric is long EWZ