A Tale of Two Colombias
Nick is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
After spending over half a century pioneering commodities and other global investments, Van Eck Global has spent the last several years developing exchange-traded products and become the fifth largest ETP provider in the US (and the eighth largest worldwide). Building off their experience developing USD 25 billion in ETFs, their Market Vectors team discusses their reasoning and outlook on the future of frontier and emerging market opportunities.
Van Eck Market Vectors Team: [GXG] is more of a top 20 ETF. [COLX] is broader based, and is actually a little more diversified because of the caps we implement at the security level. For instance, Ecopetrol (NYSE: EC) is only 7% to their 14%. They are more large cap focused, and we perhaps provide a little more local exposure…We have some offshore names in [COLX] that are domiciled in Canada, but they derive more than half their income from Colombia, which is consistent across most of our international ETFs. By having our lower caps it helps move the weightings away from the ETF being dominated by larger companies that tend to be exporters or multinationals, whereas the mid- and small caps tend to be more locally oriented.
Slepko: Having lived in the country, and looking over their compositions – and recognizing that everyone is going to have some Bancolombia (NYSE: CIB) [both funds are comprised of about 13% of the country’s leading financial institution] – GXG and COLX are quite different funds. [Besides having 40% different holdings, the weighting among the shared holdings is over 32% different as well.] However, I’m curious, since Americans have a hard time even finding California on a map, is the interest in the US market enough to support two funds – even for a place like Colombia that by every metric is booming and continuing to get better and better?
Van Eck: Investors at large are currently reevaluating their exposures and allocations to emerging markets in general – and that includes what countries they consider are emerging markets, what percentage of their portfolio they want involved in emerging markets, how risky they used to feel emerging markets were compared to how they feel going forward. They tend to use ETFs as a bridge to get that allocation where they want it to be. I think as American investors learn more and more about each country’s profile out there, they are going to use ETFs to get that exposure, versus having to pick stocks. It used to be in an emerging market that if you wanted to play in a country you bought its telephone company or largest bank, now the options are getting more sophisticated.
Whether there’s enough money out there to support two funds long-term is still being decided. As of now we wanted to get our flavor out there for investors to choose from. We think Colombia is a long-term, compelling investment.
Slepko: Why should the average US investor not just invest in the two ADRs for Bancolombia and Ecopetrol, and be done with it?
Van Eck: This highlights one of the advantages of the Market Vectors index methodology, which chooses exposure to publicly traded companies via the most liquid vehicle available. This may result in owning the locally listed shares, or the ADR equivalent.
Slepko: In 2009, Global X relied on GXG riding the wave of pent up demand among Colombian investors wanting to invest in their own country. Entering the market two years later, where did Van Eck expect COLX’s early demand to come from? And what in particular prompted you to enter as a late second option to the party?
Van Eck: There are definitely times when there is institutional interest, and while we didn’t earmark a particular segment of the market for initial interest, we did have interest from those looking at emerging markets in general.
It’s definitely harder when launching a second fund for a particular theme. A lot of institutions tend not to get involved in ETFs until they get to be a certain size. So retail interest (do it yourself investors or individuals working with an advisor) is important. It is also difficult to determine who exactly is buying your ETF so we try to cover across channels.
Ultimately, Market Vector’s launched the Colombia ETF because we felt that [GXG] provided excessive allocations to a few names. One element of the Market Vectors index methodology is an 8.5% weighting cap to any single name. We feel that this element provides the potential for more name diversification within COLX.
Slepko: Colombia is likely the single best emerging market to invest in this decade, but Van Eck has a number of other funds covering frontier and emerging markets around the world. Is there one in particular that you think shows promise and that individual investors should consider?
Van Eck: Our Emerging Markets Local Currency Bond ETF (NYSEMKT: EMLC) is about at the billion dollar level now, and we were the first to launch an ETF on that asset class here in the US. It is a broad emerging market ETF and based on the financial fundamental strengths of emerging versus developed markets and their yield potential.
EMLC offers investors access to higher yields than are generally available from government bonds of most developed countries. Furthermore, these EM economies have experienced strong economic growth, improved balance sheets and healthy reserves over the last decade, whereas most developed country economies are experiencing very low growth, and been stagnate during the recession.
We think individual investors should consider EMLC for four reasons:
- Yield potential – Over recent history, EM bonds have provided an attractive source of yield for income investors
- Credit quality – Over 75% of the J.P. Morgan GBI-EMG Core Index [which EMLC tracks] is rated investment grade
- Economic growth – EM economies have experienced strong economic growth, improved balance sheets and healthy reserves over the last decade
- Diversification potential – This asset class provides two distinct sources of return, currency appreciation potential and yields
Nick Slepko (hukgon) has no position in any company mentioned here at the time of publication. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!