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Exchange-traded funds have made their way into the stock exchange markets, influencing currency exchange rates and emerging market patterns. The pattern is primarily driven by the fact that developed economies are constantly forming trading partnerships with emerging markets. The emerging markets' stock exchanges have risen; similarly, the Colombian Peso has been performing reliably against the US dollar (USD). An exchange-traded fund is a mutual investment instrument whose securities are traded on the stock exchange during the day at a market-determined amount. Columbia profits from ETFs, which have been one of the most promising financial innovations in recent years. The Columbian Peso is the currency used in the Columbian stock market, and therefore it is the currency used in their respective ETF market. Therefore, this paper seeks to study Exchange Trade fund in Columbia analyzing the performance of Columbia Peso against United States dollar, from 2005 to 2010.
The Columbian Peso historically demonstrates a heightened volatility against the United States Dollar. The volatility of the currency is as a result of the push-ups and pits by external and internal factors (Hernando, 129). In the periods between 2005 and 2010, the currency experienced sizeable swings against the United Stated dollar making economists term it as the most volatile Latin America currency (Colombia Threadneedle Investments, I, 289). The swings highly affect the ETF market in the area, even against other world currencies. Historically, the Peso links closely to the price of oil and any past productions increase or decrease altered the strength of the Columbian Peso. The continued development in Colombia also highly contributes to the volatility of the USD/COP exchange rates. In a bid to stabilize the volatility of the Colombia Peso, the Colombia Federal Bank consistently formulated and implemented monetary and fiscal regulations policies and frameworks (Hernando, 133).
According to 2017 semi-annual report Colombia Threadneedle Investments (CTI), pp. 56 Colombia is the largest economy in the South America to nations between Venezuela and Chile regarding its nominal Gross Domestic Product. As an emerging market in the year, 2005 Colombia embarked on efforts to bring about recovery efforts at such a time when the world developed were struggling with economic stability (CTI, 78). On July 2005, the period deemed to have the lowest exchange for COP against USD had it exchange at 1 COP going at 0.000032 dollars. On the periods between 2005 and 2007, the Colombia_x0092_s government consistently experienced economic struggles (Kamin, 246). Nonetheless, the impacts made minimal impacts on the ETFs in the stock exchange. However, the struggle against double-digit inflation and the unemployment rate of more than 20% has always hurt EFT and the currency strength in the Colombian economy.
To uplift a stagnated ETF in Colombia in between after the millennium there was progress in the emerging markets which highly boosted the Colombian equities. The country also had a 14% year-over-year upward growth in construction and public work spending (CTI, 2015, 211). This bid had the Colombian Peso, regain its exchange rate back to 0.000034 against USD. However, in 2009 the increased public works led to an increase in the country_x0092_s budget deficit. Despite the heavy debt and an expected further debt growth of 2.7% by the government by the end of 2010, the ETF performed evenly (CTI annual report 2017, 300). Also, the prospected integration of the Peruvian, Chilean and Colombian market played a major role in ensuring the stability of the each country_x0092_s ETF and currency exchange rates. The economics vicissitudes facing Colombia are almost identical to those facing the United States, which include the high unemployment and weak retail sales.
Despite the fact that Colombia is having a larger Nominal Gross Domestic Product (GDP), the EFT markets like iShares S & P Latin America 40 Index Fund (ILF), and Emerging Latin America ETF (GML) were yet to post any of their allocations to the Colombia stock market (Kamin, 258). However, towards the end of 2010, the GXG (Global X/InterBolsa FTSE Colombia 20 Exchange Trade Fund), sought to bring aboard the mechanisms that would boost the performance of Colombian highly liquid stocks. The GXG forms its operations by market capitalization weighted index, which made the ETFs heavy however it exposed the stock to oil price fluctuations (Hernando, 130-131). The exposure of the stock market to oil fluctuation is due to the fact more than 20% of GXG is made up of the state-controlled oil firm.
The trend of the Colombian Peso against the United States dollar and the Exchange Trust Fund has been one of the consistent swings and momentarily stabilities. The lowest USD/COP exchange rate happened in the July 2005 going to a rate of 1 COP = 0.000034 USD, this downfall mainly triggered by the fluctuation in the prices of oil and the oil products. The direct and indirect correlation between the Colombian Peso and the oil prices renders the currency highly volatile. However, the regulatory policy and fiscal policies by the Central Bank of Colombia in the year 2006 ensured the swings of the currency did not go overboard. The EFT in Colombia also received a uniform, though the low-scaled trend in the period between 2005 and 2010. The uniformity in the growth trend of EFT is as a result of the minimal impacts from the volatile Colombian Peso. Despite the fact that majority of the Latin American EFTs did not make any allocation on the Colombian Stock market throughout the period, the GXG ETF works well in the Colombian stocks.
Colombia Threadneedle Investments (CTI), Columbia ETF Trust, Annual Report; Columbia ETF Trust 225 Franklin Street Boston, MA 02110, October 2015 pp. 208-319.
Colombia Threadneedle Investments (CTI), Columbia Variable Portfolio- Seligman Global Technology Fund, Semi-annual Report; Columbia ETF Trust 225 Franklin Street Boston, MA 02110, June 2017, pp. 46-97.
Hernando Vargas, Monetary policy and the exchange rate in Colombia, BIS Paper No. 57, Journal of International Economics. 2010 pp. 129-152.
Kamin, Steven. The Transmission of Monetary Policy in Emerging Market Economies. Basle: Bank for International Settlements, Monetary and Economic Dept, 2007. Pp. 245-371.
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