The iShares MSCI Chile Capped ETF (NYSEArca: ECH), like so many single-country emerging markets ETFs, has more of this year falling than rising. And as is the case with scores of other country-specific ETFs tracking developing world economies, a substantial portion of ECH’s woes can be blamed on slowing Chinese economic growth.
Chile is the world’s largest copper producer and even though ECH is not excessively allocated to the materials sector, the country and the ETF are viewed as commodities plays. China is the world’s largest copper consumer and that gives Chilean equities a correlation that is perceived as intimate to Chinese economic growth. [Chile ETF: A Diversified Commodity Play]
The reality is the materials sector is merely the fourth-largest sector weight in ECH. At 11.3%, materials stocks are less than half as important in determining ECH’s returns than are utilities names. Interestingly, ECH and the iShares China Large-Cap ETF (NYSEArca: FXI) are not as correlated as investors might think. While ECH is less volatile, it is down 15% over the past year compared to a 14.2% gain for FXI. Over the past three years, ECH has tumbled 24.5% while FXI is off just 2.1%, indicating the correlation between the two ETFs is far from tight.
The combination of Chile being classified as an emerging market and its status as a commodities play proved too heavy of a burden when tapering speculation started in late May. As investors fretted over the possible loss of easy money flowing to emerging markets, ECH plunged 20% from May 22 through August 20, entering a bear market along the way. [Single Country ETFs Slammed by Fed Talk]
ECH has perked up in a big way this month, surging 11.4% as emerging markets ETFs have rallied thanks to a no tapering assist from the Fed. That performance makes ECH the second-best single-country Latin America ETF this month behind the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ). Importantly, ECH has soared even as copper prices have not. The iPath DJ-UBS Copper TR Sub-Index ETN (NYSEArca: JJC) is off almost 2% since the start of September.
While economic growth is slowing in Chile, interest rate cuts may not be necessary following stellar July retail sales numbers. Traders widely expect the Chilean central bank to leave interest rates at 5%, the second-highest among Latin America’s major economies behind Brazil, according to Bloomberg.
“Domestically, recent output and demand figures continue along the lines of previous months: moderate growth in output and strong private consumption. Headline inflation is still within the tolerance range, while core measures continue to hover around 1% annually. Inflation expectations have remained near the target in the policy horizon,” said Chile’s central bank in a recent economic assessment.
An unemployment rate of 5.7%, one of the lowest in the region, could be another positive catalyst for increased domestic consumption in Chile. In turn, that should be a positive for ECH, which allocates over 24% of its weight to consumer-oriented stocks.
iShares MSCI Chile Capped ETF
ETF Trends editorial team contributed to this post.