Elections Could Test Colombia ETFs

The Global X MSCI Colombia ETF GXG, the largest exchange traded fund tracking Colombian stocks, closed modestly higher Monday after the country held parliamentary elections. The election was the first in Colombian history to include the Revolutionary Armed Forces of Colombia, or FARC, guerrilla faction as an official political party.

As expected, FARC performed poorly, but did win a few a seats. In lopsided fashion, voters favored the Democratic Centre party and conservative parties opposed to the 2016 peace accord with FARC. Sunday's parliamentary elections were viewed by some market observers as a prelude to national elections in May, meaning GXG and Colombian stocks are not out of the political woods quite yet.

GXG, which turned nine years old last month, follows the MSCI All Colombia Select 25/50 Index. The ETF holds 26 stocks.

Fragile Confidence

While developed market elections have the potential to rattle investors' confidence, it's particularly true of smaller emerging markets, such as Colombia.

“However, confidence among investors could be shaken in the shadow of a contentious election season,” reports CNBC. “Sunday's vote takes place in a polarized environment. As part of the peace agreement, former members of the Revolutionary Armed Forces of Colombia — the guerrilla army that laid down its arms as part of a peace agreement, but is still responsible for more than 200,000 politically inspired deaths — will send at least 10 representatives to Colombia's bicameral legislature.”

Colombia has been a favored Latin American destination for foreign investors over the past decade. Foreign investors have allocated $16 billion to the South American economy over the past 10 years, according to CNBC. That said, GXG and the iShares MSCI Colombia ETF ICOL, the only other US-listed Colombia ETF, have just $121 million in assets on a combined basis.

Beware Volatility

Political volatility is a factor to watch with GXX and ICOL because Colombia's equity market is more volatile than traditional emerging markets benchmarks. For example, GXG has a standard deviation of 26.3 percent, or about 1,000 basis points above the standard deviation on the MSCI Emerging Markets Index.

“Colombia's economy is expected to grow by nearly 3 percent this year, yet analysts estimate Colombia will need to invest billions in order to integrate demilitarized FARC members and offset the insurgency's influence on key sectors of the economy,” according to CNBC.

GXG allocates 48.6 percent of its weight to financial services stocks, with the materials and utilities sectors combining for over 30 percent.

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