Score one for Goliath. Three weeks after Global X announced that it would launch the first ETF investing exclusively in Peruvian equities, iShares beat its much smaller rival to the punch, launching the MSCI All Peru Capped Index Fund (EPU). EPU, which has an expense ratio of 0.63%, provides investors with an opportunity to invest in one of the world’s most promising markets. “With the fastest growing economy in Latin America and one of the lowest inflation rates in the region, Peru’s essentially untapped market offers diversification benefits and poses an attractive opportunity to investors,” said Daniel Gamba, CEO of Latin America for iShares.
The launch of EPU follows on the heels of iShares Emerging Markets Infrastructure ETF (EMIF) launched late last week. It’s evident that following its agreement to be sold to BlackRock, iShares isn’t resting on its laurels, continuing its push into the emerging markets ETF arena that has attracted significant amounts of investor funds in recent months amidst a broad equity market rally.
Peru is a relatively small economy, with 2008 GDP of approximately $128 billion according to the IMF (slightly larger than General Electric’s market capitalization). But the nation has grown at a tremendous rate in recent years, spurred by the signing of a free trade agreement with the U.S. in 2006. Peru’s economy has further been boosted by rising prices for its principal exports, which include gold, copper, and zinc. Over the last year, as developed countries have experienced significant declines in GDP, Peru’s economy grew by 9%. Although EPU will initially hold 25 Peruvian equities, it will have a heavy concentration in the materials sector (65%), a fact that has Gary Gordon worried this fund will fail to distinguish itself from other international materials funds, such as DBN and IRV.
Resource-rich Latin America is a likely candidate for the next surge in growth from the ETF industry. ETFs on the market today focus primarily on the largest countries in the region: Mexico (EWW), Brazil (EWZ), Chile (ECH), Colombia (GXG), and now Peru. Even diversified Latin American ETFs are dominated by holding in the largest countries in the region – these countries make up more than 96% of ILF‘s holdings. So there is plenty of potential for ETF issuers looking to reach into uncharted territory, as Latin America is home to several additional developing economies that could attract investor interest if risk aversion continues to melt away in the summer months. Some likely candidates for the next country-specific Latin American ETF:
- Argentina: The world’s 30th largest economy, Argentina seems like a logical choice for ETF issuers looking to blaze a trail in Latin America. Once the world’s 10th wealthiest nation, instability doomed Argentina for many years, and the country suffered 25% unemployment and a 75% currency devaluation in the earlier part of the decade. Since then, the resource-rich country has bounced back, experiencing high single digit GDP growth for several consecutive years. But Argentina has been hit hard by the global recession, with GDP growth declining from close to 9% in early 2008 to 2% in the first quarter of 2009.
- Venezuela: ETF issuers are highly unlikely to launch an ETF focusing exclusively on Venezuela any time in the near future, given the strained relationships with this nation since the election of Hugo Chavez in 1998. But in the event of eased international tensions or a change in power, Venezuela would likely be an attractive market for many U.S. investors. Venezuela maintains the world’s 31st largest economy, is among the most urbanized nations in Latin America, and has an abundance of many natural resources, including oil. For the time being, however, this market might be unattractive even if it was a realistic option, as government policies have resulted in restrained growth.
- Panama: Although barely contained within the world’s largest 100 economies, Panama has expanded rapidly in recent years, and is expected to continue its rapid growth going forward. Despite its small size, Panama has established itself as an international business center, and is currently the fastest-growing economy and largest per-capita consumer in Central America. Panama is expected to be the second-fastest growing Latin American economy in 2009, behind only Peru. Because of its strategic geographic location, Panama’s economy is significantly less dependent upon commodities than are many other Latin American nations. The banking, tourism, and trading sectors all comprise material portions of Panama’s economy.
Disclosure: No positions at time of writing.