Every decade or so, another emerging market moves into the fast lane by creating the platform for sustained long-term growth. Past examples include Japan in the 1950’s, South Korea in the 1970’s and Brazil in the 1990’s. More recently, the Andean nations of Chile, Colombia and Peru have been laying the foundation for long-term economic growth.

Investors might want to give these dynamic economies a look because near-term headwinds have meant dismal investment returns in 2013 for the ETFs tracking this region. With but one exception (a fund that opened in June), Andean-related ETFs have dropped between 11 percent and 30 percent year-to-date. And that could create opportunity for bargain hunters.

Commodity Overhang

The dismal recent performance for these markets can be directly tied to China. That country’s voracious appetite for copper and minerals slowed sharply this year, leading commodity prices to plunge. In Peru, where copper exports helped fuel a decade-long boom, the slump has hit hard because mining companies account for roughly half of the local stock market.

The good news is that commodity prices, most notably copper, have likely stabilized. “That’s looking like a likely scenario given the dearth of new copper mines coming on stream and a relatively bullish economic plan from China,” Will Landers, a portfolio manager for BlackRock’s Latin American equity funds, said in an e-mail interview.

The benign commodity backdrop should enable Peru’s other economic drivers to shine. “Growing middle classes and rising domestic consumption are the drivers for future growth,” Landers said.

According to the International Monetary Fund, the Peruvian economy almost doubled in size from 2002 through 2012 as real GDP grew at an average annual rate of 6.3 percent (the highest 10-year average growth in Peru’s history). Equally impressive was that the average annual inflation rate fell to 2.75 percent during that period.

And though commodities are currently a sore spot for Peru, Landers said the recent period of robust profits in the mining sector enabled the country to make significant investments in its infrastructure, improve logistics and provide strong employment. But he cautioned that more needs to be done to improve income distribution.

Steve Magami, founder of Agro Vision Corp., an investment firm focused on Peruvian agricultural development, has seen an uptick in global interest in Peru among investors. “There’s been a huge rise in foreign direct investment in Peru over the past few years,” he says, adding that the country’s finances are in great shape. “Peru’s debt ratings have been steadily rising for the past five years.”

But can Peru handle the recent commodities slump? Magami believes the economy has built a sustainable foundation for growth. “Despite the mining slowdown, other parts of the economy are still growing nicely,” he says. Magami credits the centrist policies of President Ollanta Humala, who many feared would lurch the country too far to the left. Instead, he has created a set of pro-business policies that are fostering growth.

Peru’s economy is expected to grow about 5 percent this year, the lowest rate in a decade. But the stabilizing commodities environment is leading economists to expect a rebound next year. Economists at Credit Suisse anticipate 6 percent growth in 2014.

Still, many investors have simply chosen to ignore the prospects for a 2014 rebound in emerging market economies. “It’s just become easier to make money in developed markets,” says Russ Koesterich, chief investment strategist at BlackRock.

Koesterich believes a transition is underway that will make emerging markets less vulnerable to China-related perceptions in the future. “China is rebalancing more towards domestic consumption, and commodity prices are re-setting to reflect that view,” he says. “There’s a very good long-term growth story [among the Andean economies of Chile, Colombia and Peru], but for now the commodity overhang is still perceived as a problem.”

Andean Exposure

The iShares MSCI All Peru Capped ETF (EPU) is currently the only fund focused solely on this Andean nation. The fund’s 31 percent year-to-date decline has brought shares back to levels seen in late 2010, even though Peru’s economy has grown more than 20 percent since then.

For sure, a 48 percent weighting in mining companies has distorted this fund’s performance, but as the rest of the Peruvian economy grows, mining stocks should comprise a smaller portion of this ETF. “The fund evolves as the MSCI index which underpins it also evolves when new issues come into the market,” says Jennifer Hsui, portfolio manager at iShares, the ETF unit of BlackRock.

BlackRock’s Landers sees that as a crucial evolution for global investors looking at Andean stocks. “All these markets suffer from liquidity issues,” he says, adding that “more issuance would be welcome to allow for the equity market to better reflect economic activity.”

This Peruvian ETF carries an expense ratio of 0.61 percent, and though it had nearly doubled in value in the first 18 months from its launch in June, 2009, the sharp slump in 2013 has reduced the annualized gain to about 8 percent. Looked at another way, this ETF has underperformed the S&P 500 by roughly 60 percentage points over the past two years.

Though Peru’s population of 30 million is roughly twice the size of neighboring Chile, it’s the Chilean economy  that drives the Andean region: its GDP per capital of US$22,000 is the highest in South America, fueled by a vast consumer class.

And that middle-class heft is nicely represented in the iShares MSCI Chile Capped (ECH), with a roughly 20 percent weighting each in consumer cyclical stocks, financial services, utilities and industrial stocks. Still, that broad-based exposure hasn’t helped this ETF avoid the regional downdraft––it’s down 25 percent thus far in 2013, and it sank to a 52-week low earlier this week.

Yet the fund, which also carries a 0.61 percent expense ratio, offers an interesting contrast with its Peruvian counterpart. The Chilean economy, like the Peruvian economy, possesses vast mineral wealth and a fertile agricultural sector. But Chile’s large consumer class adds a source of economic stability.

The three Colombia ETFs on the market make it the most represented country in the region. Even though Colombia also has a strong reliance on the mining sector, these funds three have fared better than the ETFs focused on Peru and Chili.

The Market Vectors Colombia ETF (COLX) is down 12 percent year-to-date versus a 15 percent drop in the Global X FTSE Colombia 20 ETF (GXG). The iShares MSCI Colombia Capped ETF (ICOL), which debuted in June after all of the aforementioned Andean funds suffered big declines in the spring, is up roughly 6 percent since inception.

If you’d like to split the difference between the relative levels of development in these three countries, check out the Global X FTSE Andean 40 ETF (AND). The fund, which carries a 0.72 percent expense ratio, has stakes in the 40 largest and most liquid stocks in Colombia, Chile and Peru.

This fund hit its 52-week low yesterday, and is down 23 percent year-to-date and about 25 percent since launching in early 2011. That said, it did have a nice run-up between October 2011 and February 2013, and the fund’s chart indicates it could be setting up for another rally in the near future.

The key challenge for this ETF is not mining exposure. Rather, it’s a global perception that Andean economic activity is pegged to China. Yet as the years have passed, rising consumer spending has become a more central theme. Commodities still matter, but they matter less than before and will matter even less in the future as per capita GDP rates rise higher.

And this ETF is well-suited to profit from that economic transition. Top holdings include Colombian oil giant Ecopetrol, Peruvian financial services firm Credicorp and Chilean utility Enersis. 

These Andean-themed ETFs have slumped badly in 2013, but emerging economic strength in the region sets the stage for a sustained rebound once the China/commodity concerns have blown over.

Indeed, the real test for these economies will be an ability to grow even in a depressed commodity environment. BlackRock's Landers and others believe that moment has already arrived for Chile and Colombia, and will soon arrive for Peru.