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Thanks to ongoing crises in Europe, investors are finally shifting their focus from the crisis-ridden developed economies to the emerging Latin American countries. One such country which is drawing investor attention is Colombia – the fourth largest economy in Latin America (read: Broad Latin America ETF Investing 101).
The Colombian economy has nicely held up over the last several years thanks to improved security conditions, political stability and a record level of foreign investment into its oil and coal sectors. The uptick is expected to continue this year as well.
According to the International Monetary Fund (IMF), Colombia is expected to grow 4.4% in 2013, well ahead of many other nations in the region. Positive demographics with a population of nearly 47 million, strong macroeconomic policy framework and a flexible exchange rate regime will fuel further growth in the country.
Growing consumer demand in the country had resulted in 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 in 2011 and 2012. However, the inflationary pressures have now started easing and inflation currently stands at 2%.
The country’s key exports of oil, coffee and coal industrial production have suffered of late due to global slowdown and strong appreciation of the currency. With both the government and central bank purchasing dollars to limit the currency appreciation, the Colombian peso now seems to have stabilized to some extent (read: Best Latin America ETFs for 2013 (Part II): Colombia).
In spite of all the progress, unemployment rate of about 10% 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.
Beyond this, poor infrastructure, income inequality and drug-related violence remain the main challenges for the country. Further, the economy is highly dependent on the performance of the volatile oil and mining sectors.
Notwithstanding somewhat high levels of uncertainty, Colombia still holds the “investment grade” rating from all the three top agencies owing to its improved investment environment. The future economic and business prospects in Colombia seem promising on the back of worldwide efforts by both its government and central bank (read: 4 Best ETF Strategies for 2013).
Having said that, a look at the top ranked Colombian ETF could be a great way for investors to tap this emerging Latin American market. One way to find a top ranked ETF in this space is by using the Zacks ETF Ranking system.
About the Zacks ETF Rank
This technique provides a recommendation for the ETF in the context of our outlook of the underlying industry, sector, style box or asset class. Our proprietary methodology also takes into account the risk preferences of investors.
The aim of our model is to select the best ETFs within each risk category. We assign each ETF one of the five ranks within each risk bucket. Thus, the Zacks Rank reflects the expected return of an ETF relative to other ETFs with a similar level of risk (see more ETFs in the Zacks ETF Center).
For investors seeking to apply this methodology to their portfolio in the Colombian market, we have taken a closer look at the top ranked GXG, which has a Zacks ETF Rank of #1 or ‘Strong Buy’ which suggests that it will outperform its peers over the coming one-year period. The details of this impressive emerging market ETF are highlighted below:
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 and provides a nice mixture of all cap securities with large cap (49%), mid cap (32%) and small cap (19%) sharing the space.
The fund concentrates on individual securities and sectors. It puts nearly 67% of the assets in the top 10 holdings, suggesting that the return of this emerging market ETF is largely dependent on the returns of the top 10 companies. Ecopetrol, BanColombia and Pacific Rubiales Energy take the top three positions that make up for a combined 33% share in the basket.
From a sector perspective, financials comprise roughly two-fifths of the total assets while energy companies make up another fifth (read: What is Driving Bank ETFs Higher?). Though the fund has heavy sector concentration, this has clearly paid off in the past.
The product has managed assets of over $200 million so far and has seen fund inflows of roughly $22.3 million this year. This suggests that bid ask spreads are relatively tight and that total costs will not come in much higher than the 78 bps expense ratio. Further, it is less volatile as indicated by its annualized standard deviation of 15.51%.
The fund has a tilt towards the blend securities, ensuring broad diversification in terms of style (read: The Best Investing Style ETF This Fiscal?). It remains one of the top performers in Latin America, having returned over 27% last year, while yielding more than 2% in annual yields.
So for investors seeking an emerging market play off of the beaten path, GXG could be an interesting choice. The fund is tracking a country that is poised to surge higher again this year, thanks to solid demographics and a robust GDP growth rate.
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