ETF Trends
ETF Trends

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.

“Economic indicators suggest that Chile is getting weaker as copper prices are sliding. For instance, exports have been shrinking, led by the decline in copper prices, as the chart below indicates. Both the government budget and the trade balance are now in a deficit, which seems to be getting bigger as time goes by,” according to a Seeking Alpha analysis of ECH and copper prices.

Some commodities, like copper, are lower on the economic weakness in China, a major raw materials consumer, and other emerging markets.

Earlier in July, Deutsche Bank also cut its copper projections due to weak Chinese demand. DB also expects rising supply in 2016 on new mine commissions, which could cause copper to “remain vulnerable to periodic bouts of ‘shorting.’”

“The copper market is facing two or three years more of pain, though the good news for the metal, which hit a six-year low this week, is that it will recover faster than other commodities, according to Rio Tinto Group,” reports David Stringer for Bloomberg.

iShares MSCI Chile Capped ETF

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.