Powering Down on the Peru ETF

It has been another lackluster year for Latin American equities and the corresponding exchange traded funds.

Despite periods of ebullience, the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) is down more than 11% on the year while the iShares Latin American 40 ETF (NYSEArca: ILF) is lower by 7%. Other single-country offerings have offered similarly disappointing performances, but the best of the Latin American ETF bunch has been the iShares MSCI All Peru Capped ETF (NYSEArca: EPU).

That is not saying much as the lone Peru ETF is still off half a percent this year, plus the declines for Peruvian stocks are far worse when measured in U.S. dollar terms. Due to a weak sol, Lima-listed shares are off more than 6% this year. More weakness for EPU and Peruvian stocks could be on the way ahead of national elections in the South American nation, though those nations are slated for 2016.

“While Global Markets Intelligence (GMI) stands by its largely upbeat assessment of the policy climate in Lima, it deems the political environment under the current president, Ollanta Humala, as potentially disruptive to constructive policymaking ahead of the 2016 presidential elections, dissuading GMI from retaining an overweight of Peruvian shares until the incumbent unequivocally commits his regime to policy stability,” said S&P Capital IQ in a recent research note.

While the election is not an imminent event, EPU, along with other LatAm single-country offerings, has weakened considerably in recent months. Over the past 90 days, the ETF is down more than 10%, which only looks good when measured against EWZ and the Global X FTSE Colombia 20 ETF (NYSEArca: GXG), which have been twice as worse over the same period.

S&P lowered its recommended exposure on the Peruvian equity market from an over- to a market-neutral weighting. The backdrop of tumbling precious and industrial metals prices has not helped Peru or EPU.

“Peru’s mining industry is huge. While the country ranks 47th in terms of gross domestic product (GDP), falling between Algeria and Kazakhstan, it ranks fifth in the production of gold, and third in silver and copper,” reports Eric Balchunas for Bloomberg. [Peru ETF Looks for More Upside]

The $267.7 million EPU devotes 46.5% of its weight to the materials sector and five of the ETF’s top-10 holdings hail from that group. A longer-term catalyst for EPU could be Peru’s efforts to expand and open its energy sector, though those efforts could be clouded by politics.