iShares Chile ETF Outperforms Credit Suisse Chile Closed-End Fund

I began covering Chile in May of 2007, even in the absence of a corresponding exchange-traded fund. The Latin American country was/is a dominant player in the export of copper. What's more, it's GDP growth was as strong as any in the region. And its budget was essentially in check.

Yet the only alternative up to that point, the closed-end Chile Fund (CH), had been significantly underperforming iShares Latin America (ILF). And the underperformance wasn't small potatoes.

Between the 3 years 4/1/2004 through 3/31/2007, The Chile Fund (CH) had provided an exceptional aggregate return of 120%. Yet the simple choice of a passive, regional index in the iShares Latin America (ILF) offered 195%. (7,500 basis points is hardly something to sneeze at!)

Indeed, it's hard to justify an actively managed country fund with expenses as high as 2%+, when there's a passive index for the entire region that's outperforming with only 0.5% expense. (Note: The portfolio manager for CH was pretty angry with me for pointing out performance issues and expenses that an investor has to pay; in truth, I had heaped a great deal of praise on "HIS" closed-end fund.)

In spite of iShares Latin America's (ILF) better numbers, I still looked forward to a Chile ETF. And near the start of the bear market in November of 2007, I finally got my wish. Of course, by then, the world was working its way into a vortex.

Here in 2009, however, with expectations that the global industrial cycle is in the process of being "reflated," copper king Chile is back on a lot of people's maps. So I thought I'd take a look at performance issues once more; that is, how would The Chile Fund (CH) compare over the last year against its newer rival, iShares MSCI Chile (ECH).

I suppose the active portfolio manager of CH would, once again, tell me that I am missing a big picture. But you tell me?

iShares MSCI Chile (ECH) was less volatile than CH during the systemic financial breakdown in October 2008. iShares MSCI Chile (ECH) lost less than CH during the March retrenchment period. What's more, the passive index approach of using the MSCI Chile Index via ECH led to a 1-year loss of approx -4.6%; in contrast, the Chile Fund (CH) lost approx -12%.

Granted, the charts aren't flawless. And, arbitrary calendar periods are... arbitrary calendar periods. But I still can't see why I'd pursue the closed-end country fund when a passive country index exists as an alternative.

Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.

Comments

[prairiedog555:]

I like it. When compared to FCX it is a much better copper play. Better chart than EWZ.

Jun 26 06:53 AM

[Joe Eqcome:]

Gary,

While I agree with your basic conclusion, the difference in returns and variance may not be as great as you've indicated.

While not a material difference, and not changing your basic conclusion, I wanted to point out an important criterion for CEF investors is the adjusted returns for distribution and splits. This is important because of the yield nature of CEFs. Over a longer period of time it can be meaningful, particularly when compared to a non yielding investment. If you’re a trader, distribution become less meaningful.

On share price basis adjusting for distributions and splits, ECH is down 5.4% vs. down 10.2% for CH for the period sighted. (This is versus the -4.6% and -12%, respectively noted above.) This difference is due to the capital gains distribution paid by CH during the period of your chart.

Additionally, the adjusted index adjusted price standard deviation of each was fairly comparable (ECH: .13; CH: .14)

I’ve always enjoyed your work. Hopefully you’ll view this comment as additive for retail investors.

Joe Eqcome

Jun 26 01:13 PM

[Alan Young:]

CH paid out a dividend of over 5% in December. This accounts for most of the difference in price performance. If the charts showed total return rather than price, the "losses" of the two would nearly match.

I think this is what Joe is saying, too.

Jun 28 01:43 PM