Trouble Ahead For The Colombia ETF (GXG)?

by on September 17, 2010 | ETFs Mentioned:

Thanks to ongoing turmoil in developed markets, many investors have put their dollars to work in emerging markets around the globe in an effort to generate material growth in their portfolios. Many ETFs have stepped up in recent years to give investors a variety of locales in which to invest, including funds targeting the Vietnamese, Peruvian, and Polish equity markets–just to name a few. While some have not been kind to investors, others have managed to produce incredible gains in a very short period of time, rewarding some investors for seeking out exposure to emerging and frontier economies that aren’t on the radar screens of most. 

One of the best performers in this category of country-specific emerging markets ETFs has been the Global X/InterBolsa FTSE Colombia ETF (GXG), which has surged by close to 50% on the year–including a 22% gain over the past three months. This amazing run has been fueled by stellar performances from some of the fund’s top holdings, including a 62% year to date gain from top holding Ecopetrol (20.3%) and a 40.9% gain from BanColombia (19.9%). However, some are beginning to worry that the country could become the victim of its own success, as a rising Colombian peso threatens to choke off the impressive equity market rally [see The Colombia ETF's Secret Sauce].

Investor inflows have surged in recent months as the small Latin American nation saw investment reach levels 20% higher than a year ago at this time. This has pushed the peso up by more than 14% against the U.S. dollar, which has sent unemployment surging higher as some labor intensive industries struggle to continue to pay their workers and sell goods abroad with an increasingly strong currency.  “The main attraction for foreign investors are mining and energy” says Economist Roberto Steiner from a Bogotá think-tank, “Which means Colombia is competitive in sectors which are not great generators of jobs, but punishing others that are such as the flower industry,” which has seen large job losses and is an important source of exports and employment in the country [also read The Ultimate Guide To Latin America ETFs].

This situation now leaves the country with unemployment well over 12%, and with foreign demand unlikely to subside in the near-term for the country’s vast mineral wealth, many believe that policy makers will likely step in to help curb the peso’s rise. While some, including the nation’s central bank president, are calling for capital controls, others believe that the bank will expand its recent foray into the foreign exchange markets and continue to buy dollars in an attempt to weaken the peso against the greenback and once again make more industries competitive on the global stage. “History shows that this may be successful in preventing the currency from appreciating further,” Capital Economics said in a report. “But it is unlikely to weaken it substantially–something the authorities are hoping to achieve.”

While no one knows what will happen in Colombia, make sure to keep an eye on this rising star of South America to see if the country can sidestep its current problem set and continue on its path to prosperity.

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Disclosure: No positions at time of writing.