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Given the ongoing turmoil in Europe and still dismal U.S. job market, most investors are showing a large level of interest in the emerging Latin American economies. In this regard, Colombia, Latin America's fourth-largest economy, has turned into an investor hotspot (read: Forget the BRIC ETFs, Focus on the PICKs).

Over the past several years, the Colombian economy has nicely held up thanks to an improved security environment and a stabilized political situation. Both imports and exports have quadrupled during the last decade due to sound macroeconomic policies and a surge in foreign investments. Colombia’s foreign investment increased 26% in the first half of the year to $9.3 billion, according to its central bank. 

The economy grew at 5.9% last year but is expected to slow down to 4.7% this year and 4.4% in the next (as per IMF). Interest rates, meanwhile, remained unchanged at 4.75% and inflation is the lowest among the Latin American countries at 3.10%, trailing Chile. The country holds the “investment grade” rating from all the three top agencies given its improved security conditions and ability to deal with external shocks.

Colombia is a commodity export driven economy, enjoying a huge trade surplus over the last four years. The country mainly exports oil, petroleum, coal, gold, nickel and emeralds. The U.S. is the largest trading partner of Colombia (accounting for about 38% of the exports), followed by European Union, China, and Ecuador. This makes the economy highly sensitive to global economic trends and extremely susceptible to commodity prices.

Despite the slowdown in the U.S. and European Union (two of the biggest trading partners of Colombia) as well as falling commodity prices worldwide, the Colombian economy has managed to grow in the first half of the year on the back of expansion in the construction sector (read: Three Forgotten Ways to Play Europe with ETFs).

This growth, going forward, would be backed by the recent optimism in the world’s major economies. Another round of quantitative easing (QE3) by Fed and fresh infrastructural stimulus in China would propel the economy further.

Among the risks, the unemployment rate at 9.7% is the major concern for the nation’s growth. Though the rate has fallen from nearly 15% about a decade ago, it is still among the highest in the region. Colombian finance minister, Mauricio Cardenas, is seeking several tax reforms to cut the unemployment rate.

Strengthening Colombian currency is also hurting its exports. Though both the government and central bank is intervening by purchasing dollars to limit the currency appreciation, the Colombian peso has risen over 7% against the dollar this year (read: Three Currency ETFs Outperforming The Dollar).

Apart from the currency appreciation and high unemployment, poor infrastructure, income inequality, high crime rate and drug trafficking remain the main challenges for the country.

However, the future economic and business prospects in Colombia seem promising on the back of worldwide efforts by both government and central banks. Further, positive demographics support the growth story. Colombia’s population is 47 million, of which half are below 30 years of age. As a result, it is the best time to give the nation a closer look.

Currently, investors have two Colombian ETF options in the market, each of which offers great exposure to the nation’s economy. While they might appear similar at first glance, there are a number of key differences that investors should be aware of before making a choice on this nation. The similarities and dissimilarities of these two funds are highlighted below:

Global X FTSE Colombia 20 ETF (GXG)

Launched in February 2009, this fund seeks to replicate the price and yield of the FTSE Colombia 20 Index, before fees and expenses. The product holds the most liquid 23 Colombian securities in the basket. It provides a nice mixture of all cap securities with large cap (40%), mid cap (37%) and small cap (23%) sharing the space.

The fund is not widely spread across individual securities and sectors. It puts nearly 68% of the assets in the top 10 holdings. Ecopetrol, BanColombia and Pacific Rubiales Energy take the top three positions that make up for a combined 34% share.

From a sector perspective, financials, energy and basic materials combine to take up more than three-fourths of the assets, suggesting a heavy sector concentration though this has clearly paid off in the past.

The fund remains one of the top performers in Latin America, surging 18.6% so far in the year (as of October 23) and 23.2% over the 52 weeks (read: Why Colombia ETFs May Continue to Rise). It has attracted about $210.7 million in assets with a solid volume of nearly 170,000 shares per day.

Additionally, investors do not have to pay that much more beyond the stated expense ratio of 78 basis points as the fund has decent volume suggesting tight bid ask spreads. The ETF also yields a decent dividend of 0.99% per annum.

Market Vectors Colombia ETF (COLX)

This fund seeks to track the Market Vectors Colombia 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. Launched in March 2011, the fund holds 26 securities and failed to attract investors’ with a small assets base of $2.8 million.

Like its Global X counterpart, the ETF is not widely diversified as it holds about 60% of the assets in the top 10 holdings. Financials, energy and basic materials represent the three top sectors that make up for more than four-fifths of the assets.

Though the fund charges slightly less in annual fees of 75 bps from investors, its illiquid nature increases the cost of trading in the form of a wide bid/ask spread. The product trades in average daily volumes of just 1,000 shares per day.

In terms of yields, COLX has generated impressive returns of 12.4% year-to-date (as of October 23) and nearly 12% over the 52 weeks (read: Five Best Performing ETFs (So Far) in 2012). Further, it pays a low dividend yield of 0.76%.

The following table summarizes the differences between the two aforementioned Colombian ETFs: (see more ETFs in the Zacks ETF Center):

 

 

GXG

COLX

Inception Date

2/5/2009

3/15/2011

Index

FTSE Colombia 20 Index

Market Vectors Colombia Index

AUM (in millions)

$210.7

$2.80

No. of Holdings

23

26

% of assets in Top 10 Holdings

68.01%

59.82%

Expense Ratio

0.78%

0.75%

YTD Return (as of October 3)

18.63%

12.36%

One Year Return (as of October 3)

23.18%

10.92%

Dividend Yield

0.99%

0.76%

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