Europe has been dominating global headlines since the beginning of this year on deflation fears, the tumbling Euro and political drama in Greece. And now, the unexpected move by the Swiss National Bank to abandon its currency cap against euro has spread fresh jitters across the global stock, commodity and currency markets.
The Swiss Bank scrapped its three-year old peg of 1.20 Swiss francs per euro and the franc, frantically shot up 30% in just few minutes after the announcement. The currency also surged 25% against the U.S. dollar.
In 2011, the Swiss Bank had pegged its currency to protect it from rising. The bank feared that a rising franc would reduce the competitiveness of the countries’ exports to the European Union which accounts for just less than half of the Swiss exports. But now, with euro trading at a nine-year low against the greenback, the Swiss franc cap is no longer justified.
Further, the European Central Bank (ECB) is likely to announce aggressive quantitative easing (QE) measures later this month to reinvigorate growth in the continent and fight deflation. This, along with the diverging policies in the U.S. is putting pressure on the weak euro against the greenback.
The Swiss Bank also pushed its interest rates to the negative territory from 0.25% to 0.75% so as to discourage new flows into Swiss francs and ward off deflation fears that are intensifying with the collapsing oil price.
The central bank’s action has sent Swiss stocks into deep red. The Swiss Market Index tumbled nearly 9% in yesterday’s trading session, marking the biggest one-day decline since 1989. While the stocks performed badly in terms of local currency, U.S. listed shares (ADRs) surged. This is because ADRs benefit from the appreciation of franc against the dollar.
As a result, Switzerland ETFs rallied the most in two-and-half years. We have highlighted them in detail below:
CurrencyShares Swiss Franc Trust (NYSEARCA:FXF)
This ETF tracks the price of the Swiss franc relative to the U.S. dollar and appears a great way to play the appreciation of Swiss franc against the greenback. The fund has amassed $177.1 million in its asset base and charges 0.40% in expense ratio. It jumped over 17% on a single day and trades in whopping volumes of more than 23 times the average daily trading. The fund currently has a Zacks ETF Rank of 4 or ‘Sell’ rating with a Medium risk outlook.
iShares MSCI Switzerland Capped ETF (NYSEARCA:EWL)
This fund is by far the most popular and liquid ETF tracking the Switzerland economy with AUM of $985.2 million. It tracks the MSCI Switzerland 25/50 and holds 41 securities in its basket. The fund charges 49 bps in fees per year from investors. The product is heavily concentrated on the top three firms – Nestle, Novartis and Roche Holdings – with a combined share of 45.2% while other firms hold less than 4.4% share.