EPU iShares MSCI Peru and Global Exposure ETF

Amidst all global economic uncertainties, the Peruvian economy has been posting solid economic data. The economy has been growing at an average rate of more than 6% per annum since 2002 while inflation has also remained moderate over the same time period.

This is despite the fact that the central bank has kept the key rate unchanged at 4.25% since May of last year as “inflation expectations have remained within its target range and pace of economic growth has remained close to potential”.

Nevertheless, like most Latin American nations, Peru is a commodity centric economy. In fact, it is one of the largest producers of gold and silver in the world. Barring precious metals, it also exports industrial goods such as copper, zinc, iron, steel, petroleum, heavy equipments and chemicals (see Forget the BRIC ETFs, Focus on the PICKs).

This makes the economy highly sensitive to global economic trends and susceptible to economic contagion. This is best evidenced by the slowdown in U.S and China (two of the biggest trade partners of Peru) and the falling commodity prices worldwide, which has resulted in the recent slowdown in the Peruvian economy.

Nevertheless, recent optimism from the world’s major economies is perceived to be a promising phenomenon for the economy. Especially, the announcement of Quantitative Easing 3 (QE3) which is expected to push up commodity prices and fresh infrastructural stimulus for the Chinese economy are expected to be key positives for the Peru economy going forward (read Profit from China's Stimulus with this Infrastructure ETF).

It should also be taken into account that the Peruvian economy will be a direct beneficiary of the rise in commodity prices (especially precious metals) post QE3 announcement as minerals account for nearly three-fifths of the country’s exports.

Given this, some investors may want to consider some level of exposure to the nation at this time. For investors looking to play this enticing emerging market via basket approach, the following iShares ETF could make for an interesting choice (read EGShares Launches Two Targeted Emerging Market ETFs).

The iShares MSCI All Peru Capped ETF (EPU) is pretty much the only product in the ETF space—besides Global X’s AND-- that provides an opportunity for a pure play in the Peruvian equity space. The emerging market equity ETF was launched in June of 2009 and since then has managed to attract an asset base of $335.65 million.

The product charges a net expense ratio of 59 basis points per annum and pays out 2.41% as an annual yield. EPU’s portfolio is composed of 28 stocks across various sectors.

The ETF has its assets spread across the entire spectrum of market capitalization as well. Nearly 249,000 shares of EPU exchange hands each day.

From a sector perspective, more than half of its total assets are allocated in the Material Sector (around 54.5%). This is an added advantage for the ETF, especially given the commodity focus of the Peruvian economy (from a domestic consumption as well as export point of views) as the sector is most likely to post above par performance.

Among other holdings, it also places its bets heavily in the Financial sector which accounts for almost 24% of its total assets. Meanwhile, Consumer Staples (7.25%), Industrials (7.04%), Utilities (5.25%) and Energy (2.33%) are round out the rest of the portfolio.

It is also prudent to note that the ETF has an R-Squared value of just 42% against the S&P 500 (since inception). This implies that EPU has low levels of correlation with the broader U.S equity market. It thus provides an opportunity for international diversification for the U.S investors seeking more emerging market assets (read Is the Thailand ETF Unstoppable?).

Furthermore, the product has been a solid performer as the fund is up almost 26.5% for the one year period ending 30^th September 2012. Also, EPU has returned an impressive 17.35% so far this year as on the same date. Like most equity ETFs, EPU had also exhibited a two way quarterly movement till the end of the second quarter.

The ETF was up by almost 22% for the quarter ending March 2012. However, for the second quarter, EPU had slumped 9.25%. Nevertheless, at the end of September, the ETF is up by almost 4.5% for the third quarter. The ETF hit a low of $33.29 and a 52-week high of $47.53 (see more in the Zacks ETF Center).

A Technical Perspective on EPU

Since the announcement of QE3 by the Federal Reserve on September 13^th, riskier asset classes such as commodities and equities have enjoyed a decent rally. The ETF being a function of a commodity centric economy such as Peru and being largely exposed to the material sector was positively impacted by this development as well.

In fact, as of the 28^th September 2012 close, the ETF was trading at $44.31 level which is above its 30 Day Simple Moving Average (SMA) of 42.50. However, the 30 SMA was well above its 200 SMA at 42.23.

Instead, the 30 SMA had intersected the 200 SMA from below on September 26^th when EPU was trading at $43.96. On that date, the 30 SMA (at 42.22) had surpassed the 200 SMA (at 42.17) indicating the start of an uptrend. Since then, EPU has added about 0.8% in the two trading sessions (see Do You Need a High Momentum ETF?).

This trend could remain for quite some time, as the fresh round of bond buying stimulus by the Fed, proactive measures by policy makers across the Atlantic and infrastructural investments from China are expected to stir up growth in the global economy.

Therefore, at current levels, EPU provides investors the opportunity to capitalize on the positivity emitting from the global economic conditions, suggesting it could be a decent pick for investors seeking more emerging market exposure in a commodity centric nation.

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GLBL-XF ANDN 40 (AND): ETF Research Reports
 
ISHARS-MSCI PER (EPU): ETF Research Reports
 
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