Swiss Economy Is Relatively Sound; Two ETFs To Play The Swiss Market (EWL, FSZ, NVS, EWI, EWP, EWQ)
Eric Dutram: As the European crisis continues to dominate the headlines, many investors have looked to nations outside the troubled euro zone for their exposure to the region. For good reason too, as a number of major European economies—such as Italy (NYSEARCA:EWI), Spain (NYSEARCA:EWP), and even France (NYSEARCA:EWQ)—could be in for some serious trouble and could face a low growth environment due to budget cuts and unfavorable demographics.
As a result, many investors have looked to countries outside the euro zone in Europe in order to gain access to the region. However, each of the major economies that fall into this category have their own problems too, and these could be equally destructive to investors as well (see Three European ETFs Beyond The Euro Zone).
For example, both Norway and Russia are heavily correlated to the price of oil. Both of these countries are among the top ten producers of the precious commodity and oil stocks dominate their respective markets. This is fine when crude prices are surging, but a prolonged European slowdown seems likely to drag down the economies in these oil producing nations as well.
Meanwhile, Great Britain has budget deficit problems of its own and while London could get an Olympics boost, the country still has a number of structural problems that it needs to fight through in order to prosper.
Lastly, the nation of Switzerland has also been an intriguing choice although the franc is now pegged to the euro. Due to this decision by the SNB, the franc hasn’t fallen below the 1.20 level against the euro, limiting the currency’s appeal for American investors, especially if the euro continues to remain weak (read Spain ETF Slumps On Weak Bond Auction).
However, the peg has become increasingly difficult for the National Bank to defend as the broader European market remains under pressure. Should the peg be removed, investors could a surge in the franc’s value, not only against the euro, but against the dollar as well.
Beyond this issue, the Swiss economy is relatively sound, especially when compared to its neighbors in the region. Public debt is at a manageable level, credit ratings are still AAA, and the nation often runs a slight trade surplus.
These factors make Switzerland relatively unique among the world’s major developed economies and a truly remarkable case for Europe. Add in the lack of dependency on hydrocarbons to power economic growth, and investors likely have a solid, steady performer on their hands in the case of Switzerland.
Currently, ETF investors have two options to play the Swiss market. While they may appear somewhat similar at first glance, there are actually a number of key differences between the products which we have highlighted below:
iShares MSCI Switzerland Index Fund (NYSEARCA:EWL)
This is by far the most popular ETF targeting the Swiss market, having amassed over half a billion in assets. The product is also relatively cost efficient, charging 52 basis points a year while trading nearly 186,000 shares a day. Additionally, the yield is pretty decent coming in at 2.2% a year (see Top Three High Yield Financial ETFs).
In terms of holdings, the Swiss ETF has 40 securities in its basket, mostly focused on the large cap space. Three companies dominate from an individual security perspective as Novartis (NYSE:NVS), Roche (PINK:RHHBY), and Nestle (PINK:NSRGY) make up, respectively, 12.4%, 13.1%, and 22.6%. This also implies that the fund is relatively concentrated from a top holding look as close to 56% of the product is in the top five securities.
Investors should also note that the product has been a solid performer in year-to-date terms, gaining about 10% so far this year. This compares favorably to both broad European funds as well as the product tracking the UK as well.
First Trust Switzerland AlphaDEX Fund (NYSEARCA:FSZ)
For investors looking for a more active approach to Switzerland ETF investing, the relatively new FSZ could be a great choice. The product tracks the Defined Switzerland Index which looks to invest in a group of companies based in the Alpine country. However, instead of using a market cap weighting system, the ETF ranks stocks based on growth and value characteristics, hopefully only targeting the best securities in the country.
While the methodology might be sound, it does come with a slightly higher cost. Expenses come in at 80 basis points a year while volume is below 4,000 shares a day. Given this, the product looks to experience relatively wide bid ask spreads which could add to total costs for investors (read Five Cheaper ETFs You Probably Overlooked).
In terms of security exposure, the fund is much more diversified than its counterpart, only allocating about 4.9% to its top holdings including Clariant, Galenica, and Swiss Life Holding. This produces a product that has about 21% in financials, 18% in basic materials, and 16% in industrials, which is a sharp departure from EWL’s focus on health care and consumer staples.
Swiss ETF Verdict
Given this vast difference in holdings and expenses, there are clearly two very different choices available to investors in the Swiss ETF market. EWL might be more appropriate for traders or for those looking to make a play on large caps that do a great deal of business beyond Switzerland but still have franc exposure (see more on ETFs at the Zacks ETF Center).
Meanwhile, FSZ could be an ideal choice for broader exposure to the Swiss market, although the costs are clearly greater in this fund. Furthermore, due to the modified equal weight technique, the concentration looks to be a lot less in this product, potentially promoting a wider scope for a look at Switzerland equities.
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