The universe of emerging market ETFs has evolved rapidly over the past few years, as new exchange-traded vehicles have opened the doors to a number of developing countries and allowed for increased granularity in sculpting international equity exposure. During the gradual recovery efforts of 2009 and 2010, it was emerging markets that led the way back from the depths of the recession; the majority of the best ETF performers were emerging market funds, including those targeting Russia or Malaysia. But in 2011, these emerging markets have been lagging behind their developed counterparts, as concerns about runaway inflation (India), an overheating economy (China), and political instability (much of the Middle East) have caused sudden weakness in economies that seemed just recently to possess tremendous momentum and be headed for a prolonged period of impressive growth. The last few days have seen a new addition to the list of emerging nations facing major issues, as Peruvian elections wreaked havoc on stock markets both within its own borders, and in the global community [see also Three ETFs for $50 Silver].
Sunday wrapped up Peru's presidential elections, in which Ollanta Humala pulled out a surprise victory in what was considered a very tight race. Upon market open on Monday, Peruvian indexes took a major tumble, declining as much as 12.5% before trading was halted. This was the largest single-day drop in Peru's history, and the steep decline was attributable primarily to concerns among investors over how Humala will handle management of the economy. Humala is a leftist, quite the opposite of current president Alan García, which has many worried that his policies will undo all of the progress that the economy has seen over the last few years. Under Garcia's watch, Peru experienced an economic resurgence, taking advantage of skyrocketing natural resource prices to shore up government finances and signing landmark trade agreements with Brazil, Venezuela, and Chile. Worries also spouted from proposed tax hikes on foreign mining companies that Humala outlined, as such measures could hurt the resource-rich economy that depends on mining for a fair amount of its economic output [see also May ETFdb Category Kings: Best Performing ETFs].
One of the major concerns of investors was the fact that Humala had not named his cabinet as of Monday, causing widespread fear as investors have no idea what to expect from their future president. Though Tuesday saw Peruvian assets reclaim some of their lost ground, there is still a ways to go to make up the losses that the shortened Monday endured. For the time being, analysts foresee stock market woes to continue in the short term, though they do have hope for a strong future for the nation. "Peru just went through a tightly contested election, so like many places when a leftist comes to power, economy is a major worry, but I do not believe there is much to be concerned about right now," said Alejandro Gomez, an investment banker in the capital of Lima.
Investors looking to buy into the dynamic Peruvian economy at a bargain have a couple of ETFs available to them that offer significant exposure to the country. Below, we outline two ETFs with significant allocations to the country and discuss how they were affected by the dismal trading days earlier this week.
iShares MSCI All Peru Capped Index Fund (NYSE: EPU)
This pure play Peru ETF tracks the MSCI All Peru Capped Index, a benchmark that includes about 30 Peruvian companies including a fair amount of small and mid cap exposure. EPU focuses its assets on the basic materials sector of the economy, while financial stocks also receive a significant So far, 2011 has not been kind to this fund, which has lost over 20% -- a good portion of which came earlier this week. On Monday, EPU plummeted nearly 14% from Friday's close, thought it managed to claw back some of those steep losses in the following session. It should be noted that EPU has a heavy allocation towards the mining companies that are in the midst of significant uncertainty [see also Focus on Latin America ETFs: Q&A With Bruno del Ama].
FTSE Andean 40 ETF (NYSE: AND)
AND seeks to replicate a benchmark which tracks the performance of the 40 largest companies in Chile, Colombia, and Peru. Similar to EPU, this fund focuses the majority of its assets on the basic materials and financial services sectors, though energy and utilities are not far behind. Peru makes up about one quarter of this ETF, which has remained relatively flat since its inception in February of this year. But on Monday the volatility in Peru as well as concerns about collateral damage to other Andean countries weighed on AND; the fund declined by 3.7% on the day. In addition to the direct decline, Chile, Colombia, and Peru are all very dependent on the mining sector opportunities in Peru, so AND should be another fund to watch as Humala takes office, and puts new tax legislation in place.
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