The second quarter was a rough one for emerging markets stocks and ETFs. Beleaguered investors can find some glimmers of hope in the bullish performances turned in by some emerging markets ETFs in the last week of the quarter. For example, the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) surged 6.7% while the iShares MSCI Thailand Investable Market Index Fund (NYSEArca: THD) climbed 7.7% on the week.
One developing world ETF that was a standout (for all the wrong reasons) in the second quarter did not participate much in last week’s emerging markets bounce and that could be a sign of more downside to come. The iShares MSCI All Peru Capped Index Fund (NYSEArca: EPU) only rose 1.42% last week leaving the fund with a 22.1% quarterly loss. [Emerging Markets ETFs Slammed by Fed Talk]
EPU’s second-quarter woes and potential for more of the same in the third quarter extend beyond the fund being an emerging markets ETF. That is only part of the problem. The bigger issue for EPU is Peru’s status as the world’s largsest silver producer. It is also a major producer of gold and copper. Gold is coming off its worst quarterly performance since 1968 and the ETFS Physical Silver Shares (NYSEArca: SIVR) needed the benefit of 6.1% gain on Friday to trim its June loss to 11%. [Peru ETF Plagued by Metals Prices]
EPU is heavy on materials stocks with a 43.2% weight to that sector and that presents another problem for the ETF. With gold prices hovering around $1,200 an ounce, are at risk of only breaking even, or worse, losing money on production.
Last week, the World Gold Council released new guidelines that will force miners to reveal to shareholders a more telling picture about production costs. When gold prices were racing higher, miners were not under as much pressure to reveal their true costs of doing business. With shares of miners plunging, investors, rightfully so, want to know the companies’ true costs of doing business. [Beware Gold Miners’ Bounce]
For EPU and other country ETFs heavy on shares of precious metals miners, the vital near-term to issue to consider is how severely will be profits be crimped by sagging metals prices. Additionally, if gold falls below $1,100 or $1,000 an ounce, how many miners will be forced to either sell what could later prove to be valuable assets or issue bonds, weighing down some debt-heavy balance sheets in the process?