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A Potential Peruvian Problem

ETF Professor

Among developing economies, Peru often goes overlooked. The South American nation is just a scant percentage of the MSCI Emerging Markets Index and Latin American regional benchmarks, meaning investors looking for exposure to Peruvian stocks often turn to the iShares MSCI Peru ETF (NYSE: EPU).

EPU, the only U.S.-listed exchange traded fund dedicated to Peruvian equities, is down about 13 percent this year, a performance slightly less bad than the MSCI Emerging Markets Index.

What Happened

Peru is rich in natural resources. The country's export data and EPU's sector weights reflect as much. EPU, which tracks the MSCI All Peru Capped Index, holds just 26 stocks, over 77 percent of which hail from the materials and financial services sectors. Through the end of October, Peru exported more than $10.3 billion worth of raw copper.

“Peru is already the world's second largest copper exporter and recent elections indicate it's prepared to bet even more heavily on mining,” said IHS Markit in a recent note.

Chile is the world's largest copper exporter.

Why It's Important

As is the case with the iShares MSCI Chile Capped ETF (NYSE: ECH), which is down almost 20 percent this year, EPU can and does track copper prices lower. The United States Copper Fund (NYSE: CPER), a futures-based copper strategy, is down about 18.5 percent this year.

Copper's laggard performance this year is having a profound impact on EPU. Peru's second- and third-largest exports, gold and oil, don't combine for the same level of exports measured in dollars as does copper. Still, some market observers see Peru's plans to boost copper expects as a good idea.

“That's a smart play as long the world economy, in particular China, does well,” said Markit. “Copper is essential to making the pipes and electrical wiring that go into new houses and cars, making it essential as an economy reaches further stages of development.”

What's Next

Peru is rich in copper, which has enticed some of the world's largest mining companies to operate there, but the cost of doing business in Peru is not cheap.

“But for international mining companies that started flocking to Peru since the 1970s, there's always been a catch,” said Markit. “The country has one of the world's strongest anti-mining movements, dating back to native fighting the Conquistadors in the 16th century. Mining firms must invest hundreds of millions of dollars to obtain permits, which are dependent on the political willingness to permit the digging of mines and the construction of processing plants.”

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