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Should You Invest in a Venezuela ETF?


There was a time when Venezuela would have been the go-to investment destination for any foreign investor but now, putting your money in the country is a risk. In the past, the country prided itself as the largest petroleum exporter worldwide, but Saudi Arabia has since overtaken it; it now only produces a tenth of what it did twenty years ago. However, Venezuela remains the country with the largest oil reserves globally, but they are not doing the country much good since oil prices dropped in 2014. Venezuela relies on oil exports, and with low oil prices, the country suffered an outstanding debt, which has accumulated over the years to the point of being unable to pay for food imports. Still, investing in a Venezuela ETF would provide foreign investors with a diversified portfolio but is it a risk worth taking given the current state of affairs? Let's find out.

ETFs Have Been Recommended for a Long Time

In 2012, Nasdaq named Venezuela the top-performing stock market globally, explaining that in Venezuela, equities had more than tripled. As a result, Venezuela had become quite an investment attraction for foreign investors who reasoned that an ETF would be the ideal way of enjoying a piece of the oil pie. All this is despite knowing that the country's massive oil reserves were still at risk of being seized. Unfortunately, at the time, there were no equity ETFs meaning that anyone interested would have to settle for bond ETFs.

Fast forward to 2017, and foreign investors faced the same predicament. Frontera published that foreign investors who were hopeful that Venezuela would take a turn for the better would invest in the Venezuela bond ETFs or equities through ADRs. The article clarified that there were still no ETFs investing in Venezuelan equities, yet with bonds being the only option, investors faced a significant risk. However, fortunately, in the stock market, high risk translates to high returns, and with bonds being offered at a steep discount, the margins were supposed to be quite attractive to investors.

Why Investing in Venezuela ETFs is no Longer Advisable

Contrary to 2012, when the Venezuelan stock market was hailed as a top performer, in 2018, the Caracas Stock Market Index was the worst stock market performer after collapsing by 94%. Forbes reported that politics were still affecting the economy, and JP Morgan dominated the bond ETFs. As investors held in to hope that President Maduro would be ousted, the worth of the bonds had continued to decline.

The US put sanctions on crude oil from Venezuela, placing its economy in a much worse state than before. Washington insisted that the sanctions remain until Maduro was replaced through fresh elections, but that has remained a mirage. Even bond managers pulled out of investing in the country's ETFs. They said that any investor who insisted on putting his money there was irrationally optimistic. After all, chances of recovery were little thanks to the hyperinflation and drastic drop in productive capacity.

The US citizens were prohibited from buying PDVSA (the country's state-owned natural oil and gas company) bonds. 8020 Investors added that although an expert investor would take advantage of buying bonds at steep discounts and sell them later at profits, the sanctions imposed by the US make it impossible for an investor in the US to do so. However, things could change if the country voted in a new president that the US approves, which would subsequently mean that sanctions would be lifted.

There is Hope for Future Investors

Energy and Capital published that there is hope for investors, especially those who do not mind taking risks. It explained that with the price of bonds so low and Venezuela defaulting on its debts, there was the opportunity of a lifetime for an investor looking for high-risk, high-reward bond investments. The primary motivation is that the bonds could yield more than 24% returns, not including the capital gains resulting from bond prices' increase.

It is perhaps due to this enlightenment that small investment funds have begun seeing the logic of investing in Venezuela binds. Three particular investment funds: Copernico, Altana, and Canaima Capital Management, purchased heavily discounted bonds worth hundreds of millions of dollars. It was most likely a dream come true for Venezuela that had reportedly been looking for buyers of its bonds without any luck. The government's bonds worth $60 billion were unattractive since they had barely paid interest in years. The investment funds were suing to force the Venezuelan government to make payments.

Other bondholders, including ETFs, are also expected to be pushed to sell their debt after JP Morgan had to cut the index weight down to zero. Selling them at whatever price was the primary option, and with ETFs owning at least 3% of the emerging market debt amounting to $3.2 trillion, the funds would have to sell off around $1.8 billion. One worker of a bond ETF said that it is a nightmare for passive funds, yet there is nothing more beautiful in finance than forced selling.

What You Should Know about Investing in Venezuela Altogether

The Caracas Stock Market Index is the only viable stock market in the country, and it trades in Bolivars, not dollars. Therefore, when you hear that it skyrocketed to 200,000%, that should be a major cause of concern for any investor because it means the stock market has become worthless. The political unrest makes it a challenge to be sure of the direction investments will take, especially when you have to consider that the government is notorious for seizing assets and engaging in other corrupt moves. With the US being the leading importer of Venezuela's crude oil, yet the two countries are at loggerheads, investors are the sanctions' victims. You might reason that you do not have to invest in an oil ETF, but the fact remains that oil is the economy's backbone.

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Allen Lee

Written by Allen Lee

Allen Lee is a Toronto-based freelance writer who studied business in school but has since turned to other pursuits. He spends more time than is perhaps wise with his eyes fixed on a screen either reading history books, keeping up with international news, or playing the latest releases on the Steam platform, which serve as the subject matter for much of his writing output. Currently, Lee is practicing the smidgen of Chinese that he picked up while visiting the Chinese mainland in hopes of someday being able to read certain historical texts in their original language.

Read more posts by Allen Lee

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