Peru's EPU ETF: A Cautionary Tale in a Turbulent Market

In the volatile world of emerging markets, the iShares MSCI Peru ETF (EPU) has emerged as a standout performer in 2025, outpacing broader Latin American benchmarks like the iShares Latin American 40 ETF (ILF). Yet, beneath the veneer of returns lies a troubling narrative of political instability, economic fragility, and structural vulnerabilities that investors would be wise to scrutinize.

The Illusion of Resilience

EPU's year-to-date (YTD) return of 27.61% in 2025 has outperformed ILF's 24.33%, fueled by a surge in copper prices and Peru's rebounding mining sector. The fund's heavy weighting toward Southern Copper Corporation and Credicorp Ltd. has amplified gains, but this concentration also exposes it to a single sector and a single economy. Peru's GDP growth in 2025, projected at 2.8%, is modest compared to the 7.5% compound annual growth rate (CAGR) from 2000–2023—a period that masked deeper structural weaknesses.

Political Fragility: A Looming Shadow

Peru's political landscape in 2025 is a powder keg. President Dina Boluarte, who assumed power after a controversial 2022 coup, faces a staggering 93% disapproval rating. Her administration's declaration of a 30-day state of emergency in Lima and Callao—amid rising homicides and contract killings—has further eroded trust. The Marcha de Paz protests, which forced the resignation of Interior Minister Juan José Santivañez, underscore the fragility of governance.

The government's push for a bicameral Congress, despite a 2018 referendum rejecting it, highlights institutional instability. Meanwhile, the upcoming 2026 elections—announced prematurely by Boluarte—risk deepening polarization. Political uncertainty deters foreign investment and complicates policy continuity, two critical factors for EPU's long-term health.

The Commodity Curse: Overdependence on Copper

Peru's economy remains a textbook case of overreliance on commodities. Copper accounts for 40% of exports, and China—Peru's largest trading partner—absorbs 26% of its output. This dependency creates a double-edged sword: when prices rise, so do returns for EPU's mining-heavy portfolio. But when volatility strikes—whether from U.S. trade policies, Chinese demand shifts, or global economic slowdowns—the fallout could be severe.

Efforts to diversify into agriculture, tourism, and technology are nascent. The “Pueblos con Encanto” rural tourism initiative, for example, has yet to materialize into a significant economic driver. Without structural reforms to boost productivity and reduce informality, Peru's growth remains precarious.

Risk-Adjusted Returns: A Misleading Metric

While EPU's Sharpe Ratio (1.30) and Calmar Ratio (1.83) outshine ILF's, these metrics ignore the ETF's narrow diversification. EPU's top 10 holdings account for 73.72% of assets, with mining and financials dominating. By contrast, ILF's broader exposure to multiple countries and sectors—Brazil's tech firms, Mexico's manufacturing, Colombia's agriculture—offers a buffer against localized shocks.

The ETF's resilience in 2025 masks its susceptibility to sector-specific downturns. A dip in copper prices or a political crisis in Peru could trigger a sharp correction, eroding gains and testing investor patience.

A Call for Prudence

For investors seeking exposure to Latin America, EPU's performance is tempting but fraught. The fund's current drawdown of -1.37% contrasts sharply with ILF's -18.66%, but this narrow margin of safety could evaporate under prolonged instability.

A more prudent approach would involve balancing EPU with diversified regional funds like ILF or the Vanguard Latin America Equity Index Fund (VPL). These vehicles mitigate the risks of overconcentration while capturing the region's growth potential.

Conclusion

EPU's 2025 outperformance is a product of favorable commodity cycles and short-term resilience. But as Peru's political and economic challenges intensify, the ETF's structural vulnerabilities will likely surface. Investors should treat EPU as a speculative bet rather than a core holding, hedging their exposure with broader, more diversified alternatives. In the end, the real story of 2025 may not be about EPU's gains—but about the risks it leaves unaddressed.