After a rough patch in the first half of 2013, metals– especially gold, silver and copper – have finally shown some life. The industrial economy seems to be coming back a bit across the globe, while there is also a relatively sluggish dollar as well, boosting demand for hard assets.
Furthermore, the Fed’s latest meeting, in which the taper was postponed, further added to the rally in metals. The dollar slumped once more following this surprise announcement, while interest in commodity ETFs soared (read 3 ETF Winners from the 'No Taper' Shocker).
If that wasn’t enough, there has also been some bullish data from China as of late, which has helped to boost copper, as the country is a major user of the metal and it is the world’s biggest importer, so any changes in its economy will have an impact on copper prices
Given the recent upsurge in metals, it might be worth it to take a closer look at two country ETFs which are extremely vulnerable to two factors – Chinese growth and demand for metal. Consequently, these funds are likely to draw investors’ attention if China continues to bounce back, and if Fed action acts as a floor for metal prices.
One of these countries, Peru, is a large producer of precious metals, while the other, Chile, produces nearly one-third of the world’s total copper output. Chile’s government also owns and operates Codelco, the largest copper producing company in the world (read Time to Worry About the Chile ETF?).
China normally accounts for about 17% of Peru's exports while nearly one-fourth of all Chilean exports are shipped to China.
The funds in focus – iShares MSCI All Peru Capped ETF (EPU) and iShares MSCI Chile Capped ETF (ECH) – have been under significant pressure for much of 2013, but could be on track now. This is especially true given the less optimistic outlook from the Fed, and the potential for these emerging markets to benefit from a broader risk-on trade in the months ahead as well.
For investors intrigued by this approach, we have highlighted some of the key fundamentals for both of these nations and their ETFs below:
EPU in Focus
Launched in June 2009, EPU is a passively managed ETF to track the performance of the MSCI All Peru Capped Index and is the only option for a pure play in Peru. The fund is home to 26 Peruvian stocks of which financials and materials firms get the major chunk of the asset base with about 73.9% of assets invested. Among others, the fund does not invest more than 8.67% (read: Peru ETF Investing 101).
Among individual holdings, the fund appears to be highly concentrated with more than 71.4% of the asset base invested in the top 10 holdings. The top two holdings get double-digit allocation and the fund does not allocate more than 6.39% to the others. The fund charges investors 51 basis points a year in fees.
ECH in Focus
The fund follows the MSCI Chile Investable Market Index. This product holds 42 securities in total and charges investors 60 basis points a year in fees.
The ETF has amassed $408.4 million in its asset base since its introduction in November 2007. From a sector perspective, utilities (25.0%) and financials (18.2%) account for nearly 43% of the total, with consumer staples (13.8%) and materials (11.2%) making up double-digit allocations as well. With almost 60% allocation towards its top 10 holdings, the fund is exposed to higher concentration risk.
While both Chile and Peru ETFs have been in dire straits so far this year, we expect a spike in these two funds in the weeks ahead as long as metal stocks continue to move higher. However, one should not forget about the performance of other economic indicators that also drive these two country ETFs and might put them at risk.
Just for caution, of the two nations, export dependency/China connection in Chile is higher than Peru, making Chile more susceptible to changes in the trading pattern in China (read: If China Slumps, Avoid These Three Country ETFs). Both the funds carry a Zacks Rank #3 (Hold) but if metal prices continue to rise, these ETFs may see an increase in their ranks and a surge in value in the months ahead.
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