Chile ETF Fights Off Headwinds

If the current pace is maintained for the rest of this year, 2016 could go down as the year of the Latin American exchange-traded fund comeback. With the exception of the iShares MSCI Mexico Inv. mt. Idx. (ETF) EWW, the major Latin American single-country ETFs trading in New York are all sporting deep double-digit year-to-date gains.

That includes the iShares MSCI Chile Inv. Mt. Idx. Fd(ETF) ECH, which is up 17 percent this year. ECH's performance is all the more impressive when remembering Chile is the world's largest copper-producing country and the iPath Bloomberg Copper Subindex Total Return Sub-Index ETN JJC is saddled with a modest year-to-date loss.

Cheering For Chile

ECH, the lone ETF dedicated to Chilean stocks, is impressing on other fronts as well. Although Chile is the biggest copper producer, the materials sector is less than 13 percent of the ETF's weight, well behind the 32.4 percent allocated to utilities and the nearly 19 percent devoted to financial services names.

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Speaking of Chile's financial services sector, that is one of the headwinds ECH has been able to conquer to this point in the year.

In the first quarter, Chilean banks' “loan growth slowed in all business segments. Results were also hit by increased loan loss provisions and declining financial operations and currency exchange. However, a 50 percent reduction in the corporate tax rate balanced out those unfavorable factors,” said Fitch Ratings in a recent research note.

Another reason investors may be revisiting Chilean stocks is the country's docile-by-comparison reputation. For example, ECH's three-year standard deviation is just under 17.7 percent. That is about 100 basis points higher than the MSCI Emerging Markets Index and nearly 700 basis points lower than the comparable metric on the iShares S&P Latin America 40 Index (ETF) ILF.

Fortunately, slack loan growth for Chilean banks should be a major deterrent to investors considering ECH. In fact, there are some positives for Chile's financial services, which is already one of the most vibrant and transparent in Latin America.

“The Chilean banking sector has demonstrated more predictable results than other countries in the region. However, Fitch expects loan growth and asset quality will continue to weaken in 2016 on rising unemployment, which will raise credit costs. We believe the banks are successfully balancing current growth needs with improving long-term capital adequacy that will be required under Basel III when it is implemented in 2019,” added Fitch.