How A Recent Election Could Affect The Colombia ETF

Several marquee Latin American economies have been affected by electoral politics this year, namely Brazil and Mexico, the region's two largest economies.

Mexico recently held national elections and Brazil is slated to do so in October. What's getting lost in the region's electoral shuffle is Colombia, South America's third-largest economy.

What Happened

In June, conservative Senator Iván Duque won Colombia's presidential election. Year-to-date, the Global X MSCI Colombia ETF GXG, the first exchange traded fund dedicated to Colombian equities, is up 3.7 percent. That's well ahead of the S&P Latin America 40 Index, which is lower by 1.2 percent.

“Duque is set to assume office at an inflection point for Colombia and his success will be measured by his ability to grow the economy while managing the variety of challenges his country faces,” Global X said in a recent note.

Challenges facing Colombia's economy include the rising U.S. dollar, diversification beyond oil production and issues with its inflation-racked neighbor Venezuela.

Why It's Important

The $106.42-million GXG holds 24 stocks, and like many single-country ETFs tracking smaller emerging economies, the fund is top-heavy at the sector level. Financial services stocks account for over 47 percent of GXG's weight. GXG tracks the MSCI All Colombia Select 25/50 Index.

“As with the broader emerging markets, Colombia is vulnerable to potentially adverse effects from rising U.S. interest rates and a strengthening dollar,” said Global X. “Yet Colombia may be in a more favorable position than its Latam peers considering the size and makeup of its debt. Colombia has relatively low USD-denominated debt as a percentage of its GDP compared to Argentina, Mexico and Peru.”

GXG is down 2.3 percent since June 18, the day after the Colombian election, while the S&P Latin America 40 Index is up nearly 14 percent.

What's Next

Energy is GXG's second-largest sector weight at 17.35 percent, a benefit when oil prices are strong, but a potential headwind when the commodity's prices decline. Oil accounts for almost one-third of Colombia's exports, underscoring the point that the country's economic diversification efforts are undoubtedly important.

“In his campaign, Duque emphasized the importance of diversification to provide greater insulation from oil price fluctuations,” according to Global X. “Critical to these efforts is the extensive Fourth Generation (4G) public-private partnership infrastructure program, which includes various road and highway projects to connect remote parts of Colombia to cities, ports and airports.”

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