Investors looking for exposure in the developing economies of Latin America would be remiss to not take advantage of the growth opportunities in Chile. At the moment there is only one ETF that provides exposure to this important market, the iShares MSCI Chile Index Fund (ECH).
Of course, when investors think about Chile, there’s often just one thing that comes to mind: copper, and for a good reason. Chile is the world’s largest supplier of copper, exporting anywhere from 30 to 40% of the copper in the world, and is also home to the largest reserves of copper on earth—some 33%. To put that enormous quantity in perspective, the United States and Indonesia are tied for second in copper reserves, with just 7% apiece.
Indeed, Chile’s massive copper reserves have played a pivotal role in the country’s history for the last several decades. In 1971 the Chilean congress under socialist president Salvador Allende voted unanimously to nationalize the many copper mines throughout the country. These newly-appropriated state-owned enterprises would eventually become Codelco. After the military coup in 1973, when General Augusto Pinochet began selling off state-owned companies, the one company he absolutely refused to privatize was Codelco.
As the saying goes in Chile, “Codelco paga el sueldo de Chile.” Translation: Codelco pays Chile’s salary. In 2010 Codelco alone produced 1.7 million tons of copper, or 11% of the world total.
Despite this enormous contribution to Chile’s economy as well as its exports, Codelco is conspicuous in its absence from ECH’s holdings. It is not only the largest company in Chile by revenues with more than US$17 billion in 2010, its separate divisions accounted for a staggering US$10.7 billion more (Chuquicamata: $5.2 billion, Teniente: $3.2 billion Radomiro: $2.2 billion). This is to say, Codelco and its various subsidiaries had revenues in excess of US$27 billion in 2010, more than double the number two Chilean company Cencosud (US$13 billion), and more than four times ECH’s number one holding at 10.3%, Copec, with a relatively meager US$7 billion in revenues.
Now this is by no means some egregious oversight on iShares’ part. Rather, there is no way to buy shares of Codelco because it is not listed on any stock exchange. In spite of all the pro-market liberalization in Chile, it’s been a state-owned company since it was nationalized in 1971. This is a rare exception in Chile, a country that, perhaps more than any other in Latin America, has embraced neoliberal economics with open arms, where even ports, highways, state pensions, and public schools are privatized.
So, in short, assumptions can be dangerous. Chile is known the world over as a huge producer of copper, but you wouldn’t know it from looking over ECH’s holdings: 20% in utilities, 17% in financial services, and 10% in basic materials (which includes mining). A true reflection of the Chilean economy would almost certainly place mining firmly in first place.
This isn’t to say that ECH doesn’t provide exposure at all, obviously a great deal of that mining money is getting spent within the country, but it’s certainly less direct than a pure copper play like JJC (iPath Dow Jones UBS Copper ETN), which is designed to reflect the performance on copper futures contracts.
Compare the iShares MSCI Chile Index Fund (ECH) in blue, with iPath Dow Jones UBS Copper Tota (JJC) in red.