Chile ETF Resilient In Face Of Copper Slump...Sort Of

The iPath Bloomberg Copper Subindex Total Return Sub-Index ETN JJC is down 2.2 percent year-to-date. Usually, a slump like that for JJC would trickle down to the iShares MSCI Chile Inv. Mt. Idx. Fd(ETF) ECH, the lone U.S.-listed exchange-traded fund dedicated to tracking issues in the world's largest copper-producing nation.

However, the perceived intimate correlation between JCC and the iShares MSCI Chile Capped ETF has not been on display early in 2016, as ECH is up 0.9 percent. That is some good news, but it should not be seen as meaning ECH and Chilean stocks are risk-free bets.

JCC And ECH

“Chile's fiscal accounts have shown some resilience to lower copper prices and weak economic growth thus far, Fitch Ratings says. However, copper prices have languished to seven-year lows and we expect economic growth to remain weak for a third straight year. This is likely to challenge fiscal consolidation efforts at a time when social demands and reforms are creating pressure for higher spending,” said Fitch Ratings in a recent note.

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Still, it must be noted that there are five major single-country ETFs tracking Latin American economies and of that quintet, ECH is the only one in the green to start 2016. Over the past year, ECH is the second-best performer of that group, trailing only the iShares MSCI Mexico Inv. Mt. Idx. (ETF) EWW. Down 17.6 percent over the past 12 months, ECH has outperformed JJC by 450 basis points over that span.

Chile And Copper

On another positive note, Chilean policymakers have taken steps to reduce the government's dependence on copper revenue and some of those steps are paying off.

“The 2014 tax reform has underpinned Chile's fiscal resilience amid copper's retreat. Noncopper tax revenues rose by around 1.1 percent of GDP from 2013 to 2015, above the tax reform goal of 0.94 percent for that period. This more than offset the fall in copper revenues and moderated Chile's deficit during the commodity downturn. Copper's share of fiscal revenues fell to 6 percent in 2015 from over 34 percent in 2006. This level of fiscal commodity dependence is much lower than in oil-exporting sovereigns in the 'AA' category,” said Fitch.

U.S. investors appear to need more convincing about ECH, as they have pulled $18.3 million from the ETF year-to-date. That is still significantly less than the more than $118 million bled by EWW and the $80.2 million yanked from the iShares MSCI Brazil Index (ETF) EWZ.