Mining Exposure May be Hindering Peru ETF
Well-documented are the trials and tribulations experienced by precious metal mining stocks and ETFs over the past 12 to 18 months. Amid technical problems, among other issues, the Market Vectors Gold Miners ETF (NYSE: GDX) has plunged more than 11 percent year-to-date.
Unfortunately, mining sector woes may be catching up with one of 2012's top-performing Latin America ETFs, the iShares MSCI All Peru Capped Index Fund (NYSE: EPU).
The iShares MSCI All Peru Capped Index Fund tracks South America's fastest-growing economy, one that is heavily dependent on the export of precious and industrial metals and other raw materials.
Earlier this year, EPU was spotted making new highs, but the fund has dropped 3.4 percent in the past month. EPU's month-long slide is concerning on multiple levels, not the least of which is the fact that the fund is the worst performer over that time of the four largest country-specific ETFs tracking South American nations.
Even the downtrodden iShares MSCI Brazil Index Fund (NYSE: EWZ) has outpaced EPU in the past 30 days.
EPU is also declining after Peru reported December GDP growth of 6.83 percent, up from 6.71 percent in November. That easily topped the 6.2 percent analysts expected. Many analysts and banks are forecasting Peruvian GDP growth of six percent this year.
Even if the World Bank estimate of Peruvian 2013 GDP growth of 5.8 percent proves accurate, the country will still sport better growth than Argentina, Brazil, Chile, Colombia and Mexico.
Statistics like that add to the near-term concern over EPU's retrenchment and perhaps highlight the fact the declines in mining stocks are finally starting to take a bite out of an ETF that last year proved impervious to that sector's problems.
Unlike the iShares MSCI Chile Investable Market Index Fund (NYSE: ECH), which is erroneously viewed as a commodities play despite a materials only representing 14.4 percent of ECH's weight, EPU is a commodities/materials ETF. The materials sector accounts for nearly 49 percent of EPU's weight.
In 2011, Peru was the world's sixth-largest gold producer.
In particular, Peru's status as a major gold and silver producer appears to be what has recently been ailing EPU. On Monday, Compañía de Minas Buenaventura (NYSE: BVN), EPU's third-largest holding with an allocation of nearly 10 percent, plunged and it appears volatility in that name is increasing.
Add to that Peru's December 2012 trade surplus plunged to $679 million from $1.3 billion surplus a year earlier as exports fell 16 percent, Bloomberg reported. Waning demand for copper and precious metals lead to the December decline.
With the mining sector being far from nirvana, EPU presents a dichotomy to investors. With miners representing nearly half of the ETF's weight, there is near-term risk. Still, there is a bull case for EPU and Peru.
The aforementioned growth statistics fortify that assertion. Peru's government balance sheet is sturdy. Jim O'Neill of Goldman Sachs (NYSE: GS) and BRIC acronym fame, recently wrote in Barron's that along with Chile and Colombia "there is great excitement and change" in Peru.
The easy way of looking at EPU at the moment is to wait and see if it holds support at $46. If it does not, $43 is likely the next stop on the way down and that could be a compelling entry point for prescient investors.
For more on Peru, click here.
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