Chile, The Forgotten South American ETF

by on October 29, 2010 | ETFs Mentioned:

In the wake of the latest global recession, it is the emerging markets of the world that have emerged as the clear drivers of global growth. As a surging consumer segment propels China and India forward, resource-rich Latin America is well positioned to benefit from increased global demand for raw materials–particularly as the U.S. dollar tumbles against most of its primary rivals. Most investors seeking exposure to South America focus in on Brazil; the most popular Latin America ETF, the iShares Latin America 40 Index Fund (ILF), allocates nearly 60% of assets to Brazilian equities. But the region’s largest economy has failed to produce they eye-popping gains that many other emerging markets have delivered; the largest and most popular Brazilian ETF–the iShares MSCI Brazil Index Fund (EWZ)–has only gained only about 5% so far in 2010, far below many of its emerging market peers.

Two of Brazil’s smaller neighbors–Peru and Colombia–have produced remarkable gains that far outstrip the results of Brazilian stocks. These economies, as represented by the iShares MSCI All Peru Capped Index Fund (EPU) and the Global X/ InterBolsa FTSE Colombia Index Fund (GXG), have skyrocketed by about 45% and 60%, respectively, so far in 2010, putting both in the top five for total return so far in 2010 for non-leveraged equity ETFs. However, many investors may have overlooked a surging economy also in South America that has gone relatively unnoticed despite incredible performance over the past quarter [see More Than Just Brazil: Latin America Surging Ahead].

That economy belongs to Chile, the Andean nation in South America which has nearly managed to match the incredible gains of Peru and Colombia so far in 2010. The Chilean economy is projected to expand at a 6% clip in 2010 and has recovered exceptionally quickly from the massive earthquake that struck the country earlier this year. Sound governance and prudent planning have helped to mitigate the effects from the devastating quake which struck one of the most economically important areas of the country. “Years of solid macroeconomic policies, including a structural fiscal surplus rule meant to smooth government revenues and expenditures, positioned Chile well to deal with the global economic crisis and the financial aftermath of the earthquake,” Moody’s analyst Gabriel Torres said in a statement.

This has allowed the country to achieve a bond rating of Aa3 from Moody’s–the highest level in the region–giving Chile the opportunity to borrow far cheaper and easier than their regional peers.  “Chile has practically no debt and no fiscal deficit,” said Siobhan Morden, a Latin America debt strategist at RBS Securities Inc. “In a time like this Chile says, ‘Hey, maybe I’ll issue a bond.’ They can come to the market with the conditions and terms that they want.” [see Chile ETF, Copper ETF In Focus Following Earthquake]

This strong fiscal position has been possible thanks in large part to the soaring price of copper; Chile is the world’s top producer of the critical metal, accounting for close to one-third of global supply. In fact, copper prices have surged by more than $1/lb since early June, representing a 35% increase for the country’s top export. This has led to a massive increase in total exports for the country–up about 34% from a year ago in September. Chile just reported that its trade surplus has risen to an eight-month high, allowing the country to raise rates and keep its deficits in check while simultaneously building up a significant rainy day fund [see Three Country ETFs With Low Debt-To-GDP].

Chile has also seen a boost from financially-stable banks, which are currently rated fifth strongest in the world by the World Economic Forum, and the high level of free trade that the country. Strong relationships with a number of major economies have helped Chile, which is a member of the Mercosur free trade pact and also has free trade agreements with the U.S., China, the EU, Japan, and Korea. This has allowed the nation to avoid a great deal of the currency wars and fly under the radar in terms of global trade since it is just a free and open market [see Beyond The BRIC: Ten Country-Specific Emerging Market ETFs]


Despite the incredible growth of the country, especially in the face of the earthquake that struck the nation earlier this year, there has been one key downside to the country’s economic surge.  The Chilean peso has strengthened by 5.4% so far in 2010, which represents the second highest increase of the seven major Latin American currencies. While good news for Chilean consumers hoping to buy foreign products, the appreciation has also had the effect of making Chile’s exports less competitive on the open market. “We are very much concerned because there are some sectors–particularly the agricultural sector–that are really suffering,” said Chilean President Sebastian Pinera. “We are taking measures in order to have balanced growth. Not only mining, we need also to put all the other sectors to work.”

However, in a pro-investor pitch Pinera said that his government won’t apply the tactics that Brazil has used in order to stem the real’s gain against the greenback. These measures have included a doubling of a tax on foreigners’ fixed income investments and could include further capital controls if the real continues to rise. Instead, Chile is considering “other measures to strengthen the openness of our capital account to allow for Chilean investment to go abroad,” Pinera said. “That will put some pressure on demand for foreign exchange and that will improve our exchange rate.” [see Three Country ETFs With Low Correlations To SPY]

How To Play

The iShares Chile MSCI Chile Index Fund (ECH) offers investors exposure to the dynamic Chilean economy by tracking the MSCI Chile Investable Market Index, a benchmark that consists of about 31 securities. ECH’s top three holdings go towards energy giant Empresas COPEC (12.6%), followed by Enersis (9.1%) and Empresa Nacional de Electricidad (8.8%), which are both major power generation and utility firms in the country.

The fund’s top sector allocation goes towards utilities (19%), closely trailed by financials and consumer services, which both make up around 11% of ECH’s total assets. In addition to the fund’s stellar performance over the past quarter, ECH has skyrocketed on a longer-term basis as well. The fund is now up more than 35% so far in 2010 and 55% over the past year. This roughly translates into a 17.1% averaged annualized gain since inception in late 2007, propelling the fund into the top echelon of country ETFs available to investors [read the Ultimate Guide To Latin America ETFs].

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Disclosure: No positions at time of writing.