How Copper Affects the Chile ETF

Chile is the world’s largest copper-producing nation so it is not surprising that the iShares MSCI Chile Capped ETF (NYSEArca: ECH) is somewhat correlated to copper prices and the iPath Dow Jones-UBS Copper Subindex Total Return ETN (NYSEArca: JJC).

With that in mind, knowing that JCC is off nearly 29% over the past six months means knowing that ECH, the lone Chile ETF, is lower by 21.4% over the same period. Although Chile is viewed by some market observers as the most advanced and open South American economy and it is undeniably home to Latin America’s highest sovereign credit rating (AA-), there is also no denying the country’s dependence on copper exports as a driver of government revenue. [A Chilly View on the Chile ETF]

“Copper roughly represents 40% of the country’s export revenue and minerals constitute the majority of the revenue in total,” according to Emerging Equity.

Chile is grappling with high, by its standards, inflation.

“Annual headline inflation, currently at 4.6%, has remained above the 4% mark more a year and a half, even though it’s come down from its October 2014 peak of 5.7%, and various core measures have been edging higher in recent months,” reports Dimitra DeFotis for Barron’s.

Copper is always an issue for ECH and Chilean stocks, too. When looking at ECH, the ETF’s correlation to copper prices is not readily apparent. The ETF’s materials sector weight is just 11.5%, or 650 basis points below the fund’s weight to bank stocks and well below the almost 28.5% allocated to the utilities sector. In fact, there is just one materials stock found among ECH’s top 10 holdings. However, ECH’s five-year correlation to JJC is 0.6.