Colombia may be best known for its drug cartels in the United States, but the country's legitimate economy was worth an estimated $430 billion in 2010. With an export-based economy, the country is known for its crude oil, coffee, and goal exports primarily to the United States and European Union, as well as China and other South American countries.
Colombia's Robust Economy
Colombia's economy began picking up steam in the early 1900s after the War of the Thousand Days. Through a boom in coffee and tobacco production, the country built up its transportation network, communications infrastructure and began its first major manufacturing efforts. The period between 1905 and 1915 was perhaps the country's most significant growth phase.
In 1990, the country adopted modern economic liberalization policies that included privatization of state owned enterprises, financial deregulation, reduced tariffs and a more liberal foreign exchange rate. The results were rapid growth over the next seven years, until the Ernesto Samper administration, and then again after reforms were adopted in the early 2000s.
Colombia has also become a net energy exporter with the largest coal reserves in Latin America and strong hydroelectric power generation potential. With an estimated 3.1 billion barrels of crude oil reserves, the country is well positioned given high energy prices. In addition to energy, the country also holds large amounts of nickel, gold, silver, platinum and emeralds.
Investing in Colombia with ETFs
The easiest way to invest in Colombia is through exchange-traded funds (ETFs), which offer instant diversification in a single U.S.-traded security. With approximately $180 million in net assets, as of December 2012, the Global X FTSE Colombia 20 ETF (NYSE: GXG) is the most popular ETF for investors seeking exposure to Colombia's economy.
The Global X FTSE Colombia 20 ETF holds 20 of the country's largest companies by market capitalization with a net annual fund operating expenses of 0.78%. But, investors should be aware that the top two holdings, Ecopetrol and Bancolombia, account for more than 15% of the total portfolio value, meaning there could be uneven exposure to energy and banking.
Additional options for investors include the Market Vectors Colombia ETF (NYSE: COLX), which has total net assets of around $3 million, as of December 2012, and American Depository Receipts (ADRs) that provide access to Colombian corporations on U.S. exchanges.
Some popular ADRs include:
- Ecopetrol SA (NYSE: EC)
- Bancolombia SA (NYSE: CIB)
- Pacific Rubiales Energy Corp. (TSE: PRE)
Benefits & Risks of Investing in Colombia
Colombia may be a promising emerging market economy, but there are many risks that investors should consider before committing any capital.
Benefits of investing in Colombia include:
- Emerging Market Economy. Colombia's developing economy has produced stronger growth rates than many developed countries, driven by strong energy and mineral exports during the era of high commodity prices.
- Improving Security Situation. Colombia has made great strides in improving its security situation with regards to drug cartels operating within its borders. After homicides reached a high in 2002, they have since fallen over the ensuing 10 years.
Risks of investing in Colombia include:
- Internal Security Threats. Colombia's security may be improving, but drug cartels, paramilitary groups and others present an ongoing threat to stability. As of 2003, FARC alone had an estimated 18,000 active members plus a 5,000 member urban militia.
- Reliance on Energy Prices. Colombia's primary export is crude oil and petroleum, which are sold on the global market. As a result, the country's exports are dependent on energy prices, which could decline if additional energy reserves arise globally.
Colombia's economy represents a key emerging market in South America that may suit many international portfolios. With an economy growing more quickly than developed markets, the country's ETFs and ADRs offer investors attractive growth rates with moderate additional risk.