What is EPU? (Pros, Cons, and Strategies)

If you're looking for a way to diversify your portfolio with international exposure, especially to emerging markets, EPU might be worth considering. EPU stands for iShares MSCI Peru and is a Global Exposure Exchange Traded Fund (ETF). Today, we'll dive into what EPU is, along with its advantages and disadvantages.

What is EPU?

EPU is an ETF that seeks to provide investment results corresponding to the performance of the MSCI All Peru Capped Index. This index is designed to measure the performance of the large and mid-cap segments of the Peruvian market, incorporating exposure to different sectors within Peru's economy.

Key Features of EPU

• Peruvian Market Exposure: EPU primarily invests in Peruvian companies, providing exposure to the country's growing economy.
• Diverse Sector Representation: The fund covers a range of sectors including financials, materials, utilities, and more.
• Market Cap: Focuses on large and mid-cap companies within the Peruvian market.

EPU Composition

EPU consists of well-established Peruvian companies including Credicorp (BAP), Buenaventura Mining (BVN), and Southern Copper (SCCO). These companies represent key sectors of Peru's economy such as finance, mining, and utilities.

Pros of EPU

Emerging Market Exposure

One of the primary reasons investors are drawn to EPU is its focused exposure to an emerging market. Peru has been experiencing steady economic growth, driven by its rich natural resources and increasing economic liberalization. Investing in EPU allows you to tap into this growth potential.

Diversification

Adding EPU to your portfolio offers diversification benefits. Emerging markets tend not to be perfectly correlated with developed markets, therefore including EPU can help mitigate risks and smooth out your portfolio's returns.

High Yield Potential

The Peruvian market, especially sectors like mining, often provides higher dividend yields compared to more developed markets. This can be particularly attractive for investors seeking income.

Cons of EPU

High Volatility

Emerging markets like Peru are typically more volatile compared to developed markets. Political instability, economic policy changes, and market liquidity issues can lead to sharp market fluctuations, posing a greater risk for investors.

Currency Risk

EPU’s performance can also be impacted by fluctuations in the Peruvian sol relative to your base currency. Currency risk can add another layer of uncertainty to your investment.

Limited Global Exposure

While EPU offers exposure to Peru, it's less diversified compared to global or regional emerging market ETFs. It primarily centers on the Peruvian economy, which might not suit investors looking for broader market exposure.

EPU Investment Strategies

Investing in EPU comes with its own set of challenges and opportunities. Below are some strategies to consider:

Long-term Investment Strategy

Given the volatility and risks associated with emerging markets, a long-term investment horizon is recommended for EPU. The economic growth prospects of Peru can materialize over years, if not decades. Patience is key to potentially reap the benefits.

Sector-specific Strategy

Peru’s economy is heavily dependent on sectors like mining and finance. An investor could leverage EPU to capitalize on these sectors specifically, especially if global commodity prices are on an upward trend.

Portfolio Diversification

EPU should be used as a part of a diversified portfolio. Combining EPU with ETFs from other emerging markets or developed markets can balance out specific risks and leverage global growth opportunities.

Hedging Strategy

Due to currency risk, it might be worth considering hedged versions of the ETF if available, or using separate currency-hedging instruments to protect against fluctuations in the Peruvian sol.

Dollar-cost Averaging

Given the inherent volatility in emerging markets, dollar-cost averaging (investing a fixed amount of money at regular intervals) can be a prudent approach. This helps in mitigating the risks associated with market timing and captures the average market price over time.

Conclusion

EPU presents a unique investment opportunity for those interested in gaining exposure to Peru's emerging market. While it comes with its share of pros like high yield potential and market diversification, it also carries cons like high volatility and currency risks. By employing strategies such as long-term investing, sector-specific allocation, and dollar-cost averaging, investors can better navigate these risks and potentially benefit from the growth prospects EPU has to offer.