Peruvian Persuasion: Why This ETF Is Soaring

Once lagging Latin American stocks are primary drivers of this year's emerging markets resurgence. Just look at the Brazil- and Mexico-heavy iShares S&P Latin America 40 Index (ETF) ILF, which is up 39.1 percent year-to-date, or more than double the returns offered by the MSCI Emerging Markets Index.

While Brazil, as the region's largest economy, commands most of the headlines, the real star among Latin American equity markets this year has been Peru. Peru accounts for less than four percent of the aforementioned ILF's weight, making it that ETF's second-smallest country weight ahead of only Colombia. The iShares MSCI All Peru Capped Index Fund EPU is up 77.1 percent year-to-date, nearly double the returns offered by ILF.

Peru On Top

Finding a non-leveraged, single-country exchange-traded fund that is outpacing EPU this year is not easy work. All that for a country that, just 10 months ago, was on the brink of losing its emerging markets status. Last year, MSCI, the index provider for an array of widely followed global benchmarks including the MSCI Emerging Markets Index, said it was mulling a demotion of Peru to frontier market status.

Politics are helping EPU and Peruvian stocks, but president-elect Pedro Pablo Kuczynski must manage growth-supporting fiscal stimulus without overspending and endangering Peru's sovereign credit rating.

Related Link: An Admirable First Year For Goldman's EM ETF

“Even before he eked out a narrow run-off election victory in June, Kuczynski had lifted investors' hopes with a plan for infrastructure investment, small businesses assistance and jobs programs. The Lima General index rallied 8 percent when Kuczynski finished second in preliminary elections in April and leftist candidate Veronika Mendoza was knocked out of the race,” according to Reuters.

Commodities, in particular silver, explain a significant portion of EPU's leadership this year. Peru is one of the world's largest silver producers, and major gold producer as well, so strength in those metals has more than trickled down to EPU. The ETF reflects Peru's commodities-driven economy as the materials sector is nearly 51 percent of EPU's, or almost double the fund's second-largest sector allocation, financial services.

Even after this year's stellar performance, EPU and Peruvian are not too stretched on valuation.

“The Lima General Index trades at 14.26 times earnings, well below the S&P 500's 20.00, even though it has dwarfed the S&P's 7 percent 2016 return. MSCI's Peru index has a price-earnings ratio of about 13.5, slightly higher than MSCI's overall emerging markets index PE of about 12.1,” according to Reuters.

EPU, which tracks the MSCI All Peru Capped Index, holds 26 stocks and has a price-to-earnings ratio of 16.6.

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