Behind the Plunge in Colombia ETFs


Emerging markets’ investable securities, from equities to bonds to currencies, are lately seeing extreme vulnerability to the impact of the Fed’s QE tapering. While the lull is broad-based, the blow is being felt massively in those nations which were trading at higher valuations.

Profit-booking activity amid fears of a further slump in EM securities on an accelerating bond-buying program by the Fed compelled emerging market ETFs to hurtle down in recent sessions. Whatever be its true potential, investors hardly spared any EM fund thanks to the concerns pertaining to faster QE tapering.

This was exactly the case for Colombia ETFs. Colombian funds like Market Vectors Colombia ETF (COLX) and Global X FTSE Colombia 20 ETF (GXG) are currently trading at a higher P/E multiple than many other Latin American funds like iShares MSCI Brazil Capped (EWZ), iShares MSCI All Peru Capped (EPU) and iShares MSCI Chile Capped (ECH). In fact, iShares MSCI Mexico Capped ETF (EWW) is hovering at a lower valuation than COLX (read: The Comprehensive Guide to Colombia ETFs).

Three Colombian pure-plays in the ETF world – GXG, iShares MSCI Colombia Capped ETF (ICOL) and COLX – lost about 12.5%, 14.3% and 11.8% in the year-to-date frame.  The plunge was steeper than the fall in some Brazilian small-cap funds like EWZS (down 8.7%), Mexican fund EWW (down 5.3%), Argentina ETF (ARGT) (down 10.7%) and most importantly Peru ETF EPU (down 5.3%).

With the Fed having decided on another $10 billion of tapering – which leads to $65 billion of monthly bond buying – emerging economies turmoil is back in the headlines. Though the Colombian central bank pushed its currency, the peso, lower through a dollar-buying program in 2013 to give a boost to its all-important export sectors, the steeper-than-expected decline might cause a setback for the economy.

Notably, Colombia is a major exporter of oil, coal and coffee. Coffee prices declined about 20% in 2013 due to the supply glut and are expected to remain under pressure this year as well.

Also, a weaker currency allows exporting countries to sell higher amounts which in turn increase availability in the market, but at the same time weigh on prices (read: Don't Be Fooled by the Coffee ETF's Surge).

Another major blow came in the form of a slump in Ecopetrol’s share prices. Ecopetrol – Colombia’s state-controlled oil company – saw its shares plunge more than 40% last year and the road ahead also remains rough. As per Citigroup, increase in investment and a lower-than-expected output target for 2014 could result in reduced dividend or an equity sale.

Investors should note that Ecopetrol has about 14% exposure in GXG, 16% in ICOL and 7.14% in COLX. Also, the global commodity prices have remained depressed for quite some time now, thus bothering the Colombia ETF greatly (read: 3 Country ETFs to Buy on an Oil Surge).

Bottom Line

It’s a rough ride for the funds following the Colombian economy now, but the scenario might improve as soon as these ETFs bottom out. The Colombian economy’s recent growth numbers have come pretty decent and the nation seems steadfast in attaining its desired level of growth even thorough prolonged monetary easing.

All three Colombian pure-play ETFs are presently hovering in the oversold territory indicating that the funds may bounce back in the near term, suggesting they could be worth a closer look after the recent sell-off.

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