Copper Surge Lifts A Familiar ETF

Commodities markets are aflutter over the recent strength in copper. With the red industrial metal residing at its highest levels in two years and breaking out on the charts, the widely followed iPath Bloomberg Copper Subindex Total Return Sub-Index ETN JJC is up nearly 7 percent over the past month, bringing its year-to-date gain to over 14 percent.

As is often the case when copper prices rise, Chilean stocks are joining the party. Earlier, this year stocks in Chile hit record highs while the iShares MSCI Chile Capped ETF ECH is higher by nearly 24 percent. Chile is the world's largest copper-producing country.

Of the major exchange-traded funds tracking South American countries, only the iShares MSCI Mexico Capped ETF EWW and the Global X MSCI Argentina ETF ARGT have outpaced ECH this year.

Defying Skeptics

Earlier this month, ratings agency Standard & Poor's downgraded Chile's credit rating to "A+" from "AA-" citing slack economic growth and low copper prices. It was the first time since the 1990s that Chile suffered a credit rating downgrade.

"The downgrade reflects prolonged subdued economic growth that has hurt fiscal revenues, contributed to increases in the government's debt burden, and eroded the country's macroeconomic profile," said S&P.

Although Chile's economy and government revenue are highly dependent on commodities prices and exports, ECH does not heavily reflect those themes. For example, the materials sector is the ETF's third-largest sector weight at 13.5 percent, or 420 basis points behind the 17.7 percent allocated to financial services stocks. ECH's largest sector exposure is 26.4 percent to utilities stocks.

China Looms Large

While China is often viewed as the primary driver of copper demand, Chile's relationship with the world's second-largest economy has grown to include other areas, indicating that China plays an increasingly important role in charting the course for Chilean exports.

“Exports to China, excluding copper, jumped 148 percent to $4.3 billion in 2016 from 2008, driven by shipments of fruit, wine, salmon and forestry products,” according to Bloomberg. “Non-copper exports to the rest of the world slid 9.1 percent to $28.2 billion over the same period. The surge in shipments to China helped the economy maintain growth, even as a slump in prices undermined copper exports.” 

Investors have added almost $21.6 million to ECH year-to-date, bringing the ETF's assets under management total to $495.3 million.

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