I had high hopes for this one... honest. I really want to believe that I can gain access to a rapidly expanding Latin American economy that has a superb bond rating.
Yet the iShares MSCI All Peru Capped Index Fund (NYSEARCA:EPU) has a 65% weighting in basic materials. There's little reason to expect that it'll perform much differently than WisdomTree International Materials (DBN) or SPDR S&P International Materials (NYSEARCA:IRV).
Few people have been as openly bullish about basic industry investing during the reflation of the global industrial cycle. (See May 27th's, "Let's Build Stuff!")
Yet that doesn't mean that one's entire portfolio should be comprised of investments that are so strongly correlated to a single theme. I've expressed this concern in numerous columns, including here.
As if to show a dramatic difference in the potential performance of Peru (EPU), the iShares folks provided 3-year, back-dated performance of the All Peru Capped Index at 23.5% annualized. The comparisons were made with other titans of emerging market investing such as the 3-year annualized results of the MSCI Brazil Index at just 1.9 and the MSCI Emerging Market at -8.2%.
Clearly, these are dramatic performance discrepancies. In fact, it would seem that the collective strength of the 25 stocks in the Peru Index... albeit, very materialistic... have pulled off something rather unique. Spectacular 3-year returns!
Credit the power of a 20% weighting in gold metal miner, Compania de Minas Buenaventura (NYSE:BVN). The 100%+ 3-year return is contributing heavily to the 3-year 23.5% annualized AllPeru Capped Index.
Still, one look at the chart, and we can see the risks of a 1/5 weighting in a single stock. In a matter of months, it shed 75% in value.
Bottom line? Over time, the iShares MSCI All Peru Capped Index Fund (EPU) is likely to correlate very highly with other resource-rich countries like South Africa (NYSEARCA:EZA); EPU is likely to correlate highly with International Materials (DBN) and Global Materials (NYSEARCA:MXI). Don't make the mistake of believing that you are well-diversified if you've got all of these investments in your portfolio.
Moreover, be sure to use stop-losses with emerging market country funds. There's a lot of ups, downs, bumps and bruises on the way to your pot of gold. Entry and exit points (yes, timing) may be crucial.
Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.