Behind Chile's ETF, Political Stability and Fiscal Discipline

Includes: CH, ECH, SQM
by: Carl T. Delfeld

Rationale and Overview:
Chile offers global investors the opportunity of gains from a country that has weathered the current global economic meltdown better than most countries. It is politically stable, resource rich and fiscally conservative and since 2003, I have been in and out of Chile several times. As a percentage of GDP, Chile is the most export-oriented country in the world and has growing trade ties to Asia. According to the Economist, the share of Chileans living in poverty fell from 38.6% in 1990 to 13.7% in 2006, and education, health care and pensions are now much more widely available.

Chile was down 52% in 2008 but came back strongly in 2009. The closed-ended CH is trading at close to an 11% discount to net asset value. The iShares ECH is now the best option for investors. ECH is a basket of 33 companies with a total market value in excess of $125 billion. It offers 29% to the utilities sector, 21% to materials, 19% to industrials and 9% to financials.

Copper, of course, is a big export and at the core of the economy, though Chile, like Norway, has been smart to put bonanza copper revenue into a rainy day fund.

The national copper company, Codelco, controls more than 20% of the world's copper reserves. Chile’s national debt is only 4% of GDP, and its sovereign wealth fund tops $20 billion. In addition, Chile’s announced $4 billion economic stimulus package packs some punch, being equal to 3% of GDP. Chile is also a free trader with a quiver of free-trade agreements with countries such as the U.S., the European Union, China, Japan, Canada, and South Korea. Chile depends on exports for 43% of its GDP.


1. Chile (NYSEARCA:ECH) was recently invited to join the OECD this week, becoming the first South American country to join and second behind Mexico in Latin America.

2. Chile's central bank also decided to leave rates on hold, as was widely expected.

3. Chile is also in the middle of its presidential elections and will likely elect an even more pro-market administration. On December 13th, Mr. Sebastion Piñera, who earned a Harvard doctorate in economics and is one of Chile’s richest businessmen as an airline tycoon, won 44% of the vote and now enters a run-off election on January 17th with a 14-point lead over his rival, Eduardo Frei, a Christian Democrat from the ruling centre-left Concertación coalition.

Risk Factor:
The risk factor is medium to high. I suggest an 8% trailing stop loss.

You may wish to couple CH or ECH with my favorite Chile stock pick, Sociedad Quimica y Minera, known as the Chemical and Mining Company of Chile (NYSE:SQM).