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Few are the countries that offer such potential for both investment gains and losses as Colombia. If you have been looking at the Global X/InterBolsa FTSE Colombia ETF (NYSEARCA:GXG) lately, make sure you have a strong stomach and a high tolerance for risk.

Colombia is a rapidly changing country, one in which basic factors taken for granted by most investors (such as security) often drive the market. President Alvaro Uribe has made great strides to expand the Colombian economy and strengthen relations with the U.S.

But the country’s relationship with Venezuela continues to be strained, with regular allegations of Venezuelan support of rebels seeking to undermine the Colombian government. If the next president can stay on course and avoid an escalation of the conflict with Venezuela, look for monumental gains in this South American republic of over 45 million people.

High Growth In Exports: More Than Just Coffee

Colombian Pacific Coast, One of the Rainiest Regions In The WorldWhen most people think of Colombia, they think of coffee. While coffee is indeed an important crop to the country, it’s not the only revenue stream for exports. Colombia is a net exporter of oil and is one of the six largest exporters of coal in the world.

With a resource hungry Brazilian economy right next door and good trade relations with China, Colombia may be poised to capitalize if and when the world economy rebounds.

In addition to being a producer of industrial commodities, Colombia is a major source of gemstones, flowers, and sugar, with a large percentage of these exports going to the U.S. In all, over 25% of Colombian imports and exports are going to or coming from the U.S.

Macroeconomics & Politics

Colombia’s national debt is nearly 50% of its GDP and almost half of the population lives below the poverty line. These issues become particularly worrisome as Uribe, the country’s pro market president, approaches the end of his term in 2010.

It remains to be seen if Colombia will follow the majority of the Americas and swing to the left, possibly stifling the market reforms of the past decade and driving investment out of the country (as we’ve seen in Venezuela and Ecuador). Venezuela’s massive oil reserves have allowed the nation to mask many of its sins, but Ecuador has not been nearly as fortunate.

Without oil reserves to fund its government, Colombia could be in danger of following in Ecuador’s footsteps.

International Issues

Unfortunately for Colombia, it borders one of the world’s most volatile dictators in Hugo Chavez of Venezuela. Colombia has clashed on numerous occasions with the left-leaning governments in Venezuela and Ecuador over a variety of topics. In fact, Ecuador and Venezuela had recently moved troops to their respective borders with Colombia over an incident involving an assassination of a paramilitary leader.

Tensions have cooled down as of late and it remains unlikely that Colombia, which has a military bigger than both of the leftists combined, would become entangled in a prolonged armed conflict, particularly given its friendly relations with the U.S.

Colombia remains a very intriguing market for investors that have an appetite for risk. The main ETF to play this market is Global X’s GXG, which tracks FTSE Colombia 20 Index, the main stock exchange in Bogota. GXG, which is comprised of only 23 individual equities, is heavily weighted towards the financials and oil and gas industries. Ecopetrol, the largest and main petroleum company in Colombia, accounts for nearly 21% of the fund’s holdings.

While its level of diversification leave a little to be desired, GXG is, for the time being, one of the only ETF options for gaining exposure to Colombian equity markets. Overall, Colombia is certainly not without its downsides, but if the global economy continues to show signs of recovery, GXG could see a big surge in the second half of the year.

GXG

Eric Dutram contributed to this article.

Disclosure: No positions at time of writing.

Source: Investing in the Colombia ETF: Promise and Peril