Good News For Colombia, Good News For These ETFs?

The comments flew somewhat under the radar, but on Wednesday, Maria Fernanda Suarez, Colombia's director of the public credit office, said her country expects "good news" from ratings agencies at the end of the current quarter. Suarez made the comments in an interview with Reuters.

She did not go so far as to say she expects a credit rating upgrade, but as Benzinga noted last year, the South American nation is ideally situated to garner a higher credit rating in the future.

Moody's Investors Service and Standard & Poor's both lifted Colombia's credit rating into investment-grade territory in 2011. Moody's has a Baa3 rating with a stable outlook on Colombia while S&P rates Colombia BBB- with a positive outlook. On the S&P scale, Colombia has a better sovereign rating than Argentina and Bolivia, among other South American nations. At BBB-, Colombia is only notch below Brazil, Latin America's largest economy.

Adding to the good news story are comment from Suarez that indicate the country has tools at its disposal to prepay bonds issued overseas as part of its effort to dampen the peso's rise. Colombia's status as a major exporter of commodities such as oil and industrial metals means the country's equity markets can be crimped by a strong peso. Arguably, the peso's run is one reason the Global X FTSE Colombia 20 ETF (GXG), the largest Colombia-specific ETF, is dealing with a small year-to-date loss.

That loss could easily turn to an impressive gain if Colombia again finds itself on the receiving end of positive ratings agency chatter. Colombia's efforts to reduce yields on its sovereign debt could also boost GXG and several ETFs that hold Colombian debt.

Suarez told Retuers Colombia would like to see yields on peso-denominated Treasury debt to levels that are comparable to sovereign debt issued by Chile, Mexico and Peru. The yield on government securities due in 2024 fell three basis points to 5.09 percent earlier today, the lowest levels since 2009, according to Bloomberg. That is still about six basis points higher than the yield on the comparable Mexican debt. Peruvian 15-year bonds carry a yield of just 4.22 percent.

One ETF that could benefit from falling Colombian yields is the Market Vectors LatAm Aggregate Bond ETF (BONO). Often touted as a way of getting exposure to Mexican debt, BONO features two Colombian issues among its top=10 holdings. Bonds denominated in Colombian pesos comprise eight percent of BONO's weight.

The Market Vectors Emerging Markets Local Currency Bond ETF (EMLC), which features broader regional exposure, has a 3.8 percent allocation to bond denominated in Colombian pesos. Colombia, South America's second-largest economy, accounts for 3.3 percent of the WisdomTree Emerging Markets Local Debt Fund (ELD). As a region, Latin America represents almost 31 percent of the actively managed ELD's weight.

Chile, Mexico and Peru all have higher credit ratings on the S&P scale than Colombia has, but over the past three years GXG has easily outperformed the comparable Chile ETF while offering lower volatility than its Chilean, Mexican and Peruvian ETF counterparts.

BY The ETF Professor