EPHE iShares MSCI Philippines

While most of the developed economies are in the doldrums, the Philippines is one of the few nations that has not only managed to perform well, but has also been able to surge past broad emerging market indexes as well. A number of trends have been responsible for this continued move higher in the market, both from a domestic perspective and in terms of exports.

Thanks to its large, young population that can speak English, the Philippines has been growing in popularity as an outsourcing destination and has emerged as a tough competitor to India. This has provided the country with a fresh source of employment, and helped to diversify the nation’s economy (read: India ETFs Slump on Weak GDP Forecast).

This has allowed the Philippines, which is still pretty undeveloped, to become a favorite destination for most investors seeking high returns in emerging markets. This is evidenced by the only ETF focused on the nation the iShares MSCI Philippines Investable Market Index Fund (EPHE).

The product has managed to amass a respectable $420 million in AUM with a solid volume of nearly 300,000 shares per day on average. So, bid/ask spread looks relatively tight for the fund, suggesting that total costs will not be much more than the fund’s expense ratio of 60 bps.

The gains in AUM and volume have undoubtedly been in part due to the country’s low levels of correlation to both developed markets as well as many emerging nations (read: Philippines ETF: A Rising Star in Emerging Market Investing).

EPHE in Focus

The ETF tracks the MSCI Philippines Investable Market Index, which looks to offer investors a broad exposure to equities listed in the Philippines. The product has 42 securities in its basket and focuses more on large caps. It does not spread well across individual securities, investing 59% of the assets in top ten holdings.

SM Investments Corp, Ayala Land and SM Prime Holdings take the top three positions with 10.54%, 8.12% and 6.27%, respectively, of EPHE’s assets.

From the sector perspective, the fund is tilted towards financials (41.8%) followed by industrial (24.5%) and utilities (10.1%). Other sectors make up a nice mix in the portfolio, although sector risk is clearly an issue.

Yet, despite the heavy financial exposure, the product has not been hampered by the unresolved European crisis, suggesting that it could be an interesting choice for those looking for financials that aren’t heavily correlated to the euro zone (read: Financial ETFs Set to Rally in Earnings Season).

Performance of EPHE

EPHE has been crushing competition since its inception in September 2010, greatly outpacing broad emerging market ETFs like the MSCI Emerging Markets index (EEM) and Vanguard Emerging Market ETF (VWO). The fund is up more than 13% while EEM and VWO both have lost around 5% so far in the year.

In fact, EPHE has delivered outstanding returns of 45.5% in 2012 and 58% since inception, implying that the product has a solid history of outperformance (read: A Trio of Top Emerging Market ETFs for 2013).

The fund currently has a Zacks ETF Rank #1 or ‘Strong Buy’, suggesting that it would continue to outperform its peers over the next year. This is because the long-term fundamentals for the nation look good in view of the political stability and popularity of the government, which stems from its commitment to accelerate the pace of reforms in the country.

According to the International Monetary Fund (IMF), the economy is expected to grow at a rate of 6% this year, up from the previous projection of 4.8%. While an improving fiscal situation (fiscal deficit is 2% of GDP), comfortable foreign exchange reserves position (up five-fold since 2005), and booming exports will spur the economy, the country faces some significant risks from poor infrastructure and corruption.

Additionally, the threat of rising inflation might put pressure on the future growth of the Philippines and the ETF given higher food prices and fast, above-average economic growth rates (see more ETFs in the Zacks ETF Center).

Bottom Line

However, we aren’t too concerned about these issues, as EPHE remains a best-in-class ETF. Furthermore, the country’s fundamentals and quickly diversifying economy should help to mitigate some of these concerns, especially in the long run.

Overall, EPHE continues to be a solid pick for emerging market ETF investors as long as inflation stays under control and the country’s economic condition continues to improve. The fund remains a star performer, seemingly no matter what is happening in broad markets, and is definitely worth a closer look by investors seeking more Asia-Pacific ETF exposure.

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ISHARS-EMG MKT (EEM): ETF Research Reports
 
ISHARS-MS PH IM (EPHE): ETF Research Reports
 
VANGD-FTSE EM (VWO): ETF Research Reports
 
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