Time to Worry about the Philippines ETF?
The rapid expansion of the ETF industry has given rise to a number of new funds targeting once obscure markets. Now, investors have access to countries like Vietnam, Egypt, and Peru in Exchange-Traded form, giving investors a variety of new options that were once reserved for institutional investors.
In continuing with this country-ETF trend, iShares launched an ETF tracking the Philippines about two years ago, the iShares MSCI Philippines Investable Market Index Fund (EPHE). The fund targets a very populous country, but one that remains an unknown to many, at least from an investment perspective (read Five Minute Guide to Philippines ETF Investing).
Nevertheless, the product has managed to amass a very respectable $139 million in AUM while trading a rather robust 140,000 shares in an average session. This puts the fund into elite company among country ETFs, especially of those tracking relatively overlooked Asian markets.
While the AUM gains have undoubtedly been in part due to the country’s low levels of correlation and exposure to both developed markets and many emerging nations in the region, the solid performance by EPHE hasn’t hurt matters either. In fact, EPHE has been on a tear since it first debuted, adding 25.9% year-to-date, and 17.9% since inception (see Southeast Asia ETF Investing 101).
This solid level of performance has easily trounced broad emerging market ETFs that are tracking benchmarks like the MSCI Emerging Markets index. EPHE has more than doubled these broad emerging market ETFs from a year-to-date look, and by an even greater margin since its inception, suggesting that the fund, and the Philippines, has been the place to be in emerging market ETF investing as of late.
However, recent weather events could signal a short-term top for the country and EPHE, as a devastating flood has wrecked havoc on the capital of Manila. Almost two dozen people have died while two million have been impacted. Meanwhile, some report that close to two weeks of rain put nearly half of the 12 million person city underwater at the peak of the damage.
August is traditionally the wettest month of the year for the city but as the metro area has added almost two million people since the start of the Millennium, the floods have become even harder to manage. Close to 300,000 are believed to still be displaced and it could take some time before everything gets back to normal in the region.
While the situation has been devastating for many of the city’s millions of residents, it could be equally bad for the economy as well. Metro Manila is the undisputed engine of growth in the nation, accounting for 33% of the national GDP despite making up roughly one-eighth of the population in the nation (see Three Overlooked Emerging Market ETFs).
Partially thanks to much of Manila being underwater, as well as a general risk-off trade in many emerging markets as of late, many investors have begun to grow skeptical of EPHE’s short term performance. The fund has underperformed both American and broad emerging markets—by about 400 basis points in the first third of August-- as the weather in the region has intensified and as more damage estimates have been known.
Due to this, some investors may want to consider avoiding EPHE for the time being, or at least until the country’s top economic region gets back on track. Without their productivity and growth engine, it is hard to imagine a scenario in which the country outperforms its emerging market brethren, at least in the short term (read Southeast Asia ETF Investing 101).
For these reasons, it may be best to cycle into other Southeast Asia ETFs for those looking for emerging market exposure. While the current flooding doesn’t look to have too big of a long term impact, it could drag on confidence or growth levels over the next few weeks, a situation that could potentially create an interesting buying opportunity for those who still like EPHE and the Philippines but are unsure of how to play the situation in light of this unfortunate situation from Mother Nature.
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