Competition Tightens For 2 Colombia ETFs

Investors have fewer—but better—choices.

PaulBritt_100x66.jpg
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Senior ETF Specialist
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Reviewed by: Paul Britt
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Edited by: Paul Britt

Investors have fewer—but better—choices.

While skirmishes in the ETF fee wars are common, the following one caught my eye.

The Global X MSCI Colombia ETF (GXG | C-43) lowered its fee to 61 basis points—or $61 for each $10,000 invested—from 68 basis points, to match the annual expense ratio on the iShares MSCI Colombia Capped ETF (ICOL | F-60). GXG’s fee reduction stood out because it was paired with an interesting switch in its underlying index.

With most ETFs—and index mutual funds for that matter—it’s the index that governs what the fund holds and how it performs, so index changes do matter.

What’s interesting here is that Global X’s GXG changed from its old FTSE index to the very same MSCI index tracked by—you guessed it—iShares’ Colombia fund, ICOL.

Why would a fund from a smaller issuer like Global X directly challenge a fund from a giant issuer like iShares with the same index for the same price?

Simple. GXG—the first mover in the space, with five years of history—dominates in assets and liquidity, and wants to continue doing so. In contrast, ICOL is fairly new, with just 13 months of history. The iShares ETF also lacks the assets under management and trading volume of its established rival.

To nip the upstart competition in the bud, GXG is adopting ICOL’s exact coverage going forward, and matching its fee. Investors comparing the two funds will find identical coverage and fees, and are left with assets and average daily trading volume as points of distinction. Those points play to GXG’s strengths.

For investors, GXG’s bare knuckle tactics produce a net benefit in my view.

True, investors now have one less choice with respect to Colombia-focused ETF coverage. Still, our analytics Fit score—using ICOL as a proxy—says that GXG’s new MSCI index delivers more marketlike coverage than its old FTSE index.

In short, the best overall choice for the space, allowing for size and liquidity, just got cheaper and more representative of the market.

 

Note that gaining exposure to the Colombian market in a plain ETF isn’t easy due to the concentrated nature of the investment exposure. For example, the Colombia MSCI benchmark index we use at ETF.com lists only 14 names, and would likely run afoul of ETF diversification rules.

The separate MSCI Colombia index tracked by ICOL and now GXG is a broader version. The index underlying the funds includes firms that aren’t necessarily incorporated and listed in Colombia so long as they have a majority of operations there. Firms must be listed or headquartered in Colombia, however. Still, the index is quite concentrated, with about two-thirds of the portfolio weight in the top 10 stocks.

Regarding performance for the two funds, ICOL—tracking the MSCI index that both funds now use—delivered higher returns than GXG while it was tracking its old FTSE index. Specifically, over the past year ended July 14, ICOL returned 15.1 percent versus 13.6 percent for GXG. This dispersion of returns underscores the relevance of GXG’s index change.

Same Story In Norway

Global X just made a similar move in the Norway equity market.

The Global X MSCI Norway ETF (NORW | C-71) also holds first mover advantage in assets and liquidity over its rival, the iShares MSCI Norway Capped ETF (ENOR | C-96). Here again, NORW has dropped its FTSE index in favor of the MSCI index tracked by ENOR, an index that better captures the space according to ETF.com Analytics. No need for a fee cut in this case, since NORW already edges out ENOR in this respect.

Three quick caveats …

First, the holdings portion of our Fit Analytics won’t reflect the index changes for GXG and NORW until early August.

Second, Global X’s use of fair-value net asset values distorts our tracking analysis, and makes true holding costs harder to compare.

Third, yet another ETF competes in Colombia—the Market Vectors Colombia ETFs (COLX | F-40), which I omitted due to its low assets.

 


 

At the time this article was written, the author held no positions in the securities mentioned. Contact Paul Britt at [email protected] or follow him on Twitter @PaulBritt_ETF.


 

Paul Britt, CFA, is a senior analyst in the ETF Analytics group at FactSet, a team that maintains and develops an industry-leading suite of ETF-related data and analytics products. Prior to joining FactSet in April 2015, he was a senior analyst at etf.com, where he performed a similar role, and worked in private placement at Pensco Trust. Paul holds a B.S. from RIT and an M.S. in financial analysis from the University of San Francisco.