As Miners Rebound, Peru ETF Goes Along for the Ride

January 14th at 10:00am by Todd Shriber

Monday’s market action was dismal to say the least as all three major U.S. indices shed more than 1%, but an interesting, almost stealth scenario was seen emerging.

The interesting part of the equation being that in the sea of red that illustrated scores of non-leveraged sector ETFs, some of last year’s worst performers, including the Market Vectors Gold Miners ETF (NYSEArca: GDX), were among the few green spots. After tumbling 54% last year, GDX (and its rivals) has its doubters, but give the fund the largest gold miners ETF this much: It is up about 8% since the start of December. [Little Love for Gold Miners ETF]

The stealth part of the equation, and one that illustrates something of a “dash for trash” equivalent to what has been seen with select single-country Europe ETFs this year, is that the iShares MSCI All Peru Capped ETF (NYSEArca: EPU) is going along for the precious metals miners ride. [PIIGS ETFs Benefit From Trash Dash]

While most emerging markets ETFs finished lower on Monday, EPU eked out a small gain and the lone Peru ETF is now higher by 5.6% since early December. That after EPU spent most of 2013 locked in a tight battle with the iShares MSCI Chile Capped ETF (NYSEArca: ECH) for the dubious honor of being the worst single-country ETF tracking a Latin American nation. EPU is still saddled with a modest loss this year, but if gold, and in particular silver miners, can find some upside, the Peru ETF is likely to the same.

Mining stocks moving EPU does not surprise to those that are familiar with the ETF as materials sector accounts for 47.4% of the fund’s weight, more than 1,700 basis points more than the allocation given to the financial services sector.

In October 2013, a report by the World Gold Council and PricewaterhouseCoopers highlighted just how levered the Peruvian economy is to gold production (even though it is the world’s largest silver producer). The report used gross value added (GVA), which measures the contribution to gross domestic product (GDP), employment and taxes paid as a metric for measuring the impact of gold output on major gold producers’ economies.

Direct GVA from gold mining in Peru is estimated to be $8 billion, according to the report. “The average amount of economic value added per ounce of gold is US$1,139 and ranges from US$946 in China to US$1,352 in Peru in 2012. The differences between countries reflect variations in labour costs and productivity.” [This Chart Explains Why Gold Moves the Peru ETF]

The country made $70 billion in mining related investments last year, according to Mineweb.

As for the overall Peruvian economy, November 2013 GDP growth, which will be announced Wednesday, is believed to have been 5% and the country’s economic output is expected to grow 6% this year.

iShares MSCI All Peru Capped ETF

Tickers

EPU GDX