Switzerland ETF Investing 101 (EWL, FSZ)
Eric Dutram: The European economies have floundered because of the financial disaster in several countries in the Eurozone. European woes continue to hamper the world economy with mounting concern for the Eurozone debt crisis. These economies are suffering from rising unemployment rates and a low-growth environment due to budget cuts (Three European ETFs Beyond The Euro Zone).
In fact, the unemployment rate in the broad euro zone was at 11.6% in September, up from 11.5% reported in August. This indicates that the unemployment rate in the region is still rising despite new measures.
Aggravating unemployment along with recession would result in the government paying more compensation to the unemployed and collecting less tax revenues. Ultimately more austerity measures would be taken by these countries which will impede overall economic activity, at least in the short to medium term.
With this backdrop, investors have duly turned their attention to regions outside the Eurozone. Switzerland in this case remains an intriguing choice.
Switzerland unlike the European Union economies is a developed economy with budget surplus and credit rating of ‘AAA’. The unemployment rate of the region stands at 2.8%, much lower than the neighboring economies (For Europe ETFs, It Is Hard To Beat Switzerland).
There is one lurking issue, however, and this is that the nation’s currency, the Swiss franc, is now pegged to the euro. The Swiss National Bank (SNB) intervened to peg its value against the euro at a floor of 1.20. The pegging led to the currency not falling beyond 1.20 thereby making it less appreciable for American investors especially in an environment where the euro continues to be weak (Top Three Currency ETFs).
But with the rising turbulence in the European market, it has become extremely difficult for SNB to maintain the peg. If by any chance the peg is removed it may lead to the currency gaining not only against the dollar but against the euro as well.
While there is some risk with this issue, Switzerland remains an interesting choice for the investors looking for some level of European exposure but without euro currency worries at ths time. For those seeking to tap this developed economy in an ETF form have two options available at this time, both of which we have detailed below:
iShares MSCI Switzerland Index Fund (NYSEARCA:EWL)
Launched in March 1996, EWL is linked to the MSCI Switzerland Index. The Index has been designed to measure the performance of the Swiss equity markets. The index is a float adjusted, market capitalization weighted index which mostly consists of publicly traded large cap stocks.
The fund manages an asset base of $654.5 million and trades with volume levels of more than 0.3 million shares a day. The average bid ask ratio stands at 0.08% (Guide to Most Popular ETFs).
EWL provides exposure to 41 Swiss securities which mostly covers the large cap section of the market spectrum. The fund appears to be highly concentrated in its top 10 holdings as nearly 76% of the asset base goes towards those stocks.
The top three holdings in the fund play a dominant role in its performance as more than 45% of the asset base is invested in it. The first three holdings are occupied by Nestle, Roche Holdings, and Novartis. Among others, the fund does not invest more than 5.74%.
For sectors, the fund appears to be heavily invested in health care. EWL allocates 28.6% of the asset base to the sector. Other than this, the fund assigns double-digit allocation to consumer staples, financials and industrials. Among others, the fund does not invest more than 7.46%.
The fund’s performance in 2011 has been disappointing delivering a negative return of 7.31%. However, in the last one year, the fund has done a good job setting off all the losses of 2011 and delivering a return of 15.8% (Inside The Two ETFs Up More Than 140% YTD).
The fund charges a fee of 52 basis points annually from investors and has generated a yield of 2.58% in the process.
First Trust Switzerland AlphaDEX Fund (NYSEARCA:FSZ)
Launched in February 2012, First Trust Switzerland AlphaDEX Fund (FSZ) is the latest addition to the Swiss ETF lineup.
FSZ is a passively managed ETF designed to track the performance of the Defined Switzerland Index, an index dominated by the stocks selected on the basis of AlphaDEX screening methodology.
The AlphaDEX methodology for selecting stocks uses both growth and value factors for determination of the stocks to be included in the fund. In this way, investors get a blend of both growth and value stocks in one fund.
The methodology may sound interesting and could lead to outperformance, but this comes with an extra cost of 80 basis points annually.
Unlike its iShares counterpart, the fund has not been that popular among investors as indicated by the trading volume of just 600 shares a day on average (Guide to the 25 Most Liquid ETFs). Since its inception, the fund has been able to amass an asset base of $4 million. So it appears that EWL dominates the investor portfolio when it comes to Swiss ETF investing.
The ETF seeks to invest its asset base across the market spectrum with a slight tilt towards small caps. Among mid caps and large caps, the fund appears to be equally spread out.
The fund appears to be moderately concentrated in the top 10 holdings in which it allocates 40% of the asset base.
In terms of sector allocation, financials dominates the holding pattern with double-digit allocation of 34.18%. Industrials, materials and health care also get double-digit allocation in the fund. In the top 10 holdings, financials and industrials dominate the holding pattern.
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