Switzerland ETFs: Safest Play in Europe? - ETF News And Commentary
Europe has rebounded quite well and is now performing
remarkably on rising consumer confidence, declining unemployment
rates, rising exports, firmer currency, less concerns on debt
levels as well as improving manufacturing and service sectors.
This growth is broad based, led by the U.K. and Euro zone, which finally emerged from its six-quarter long recession. Switzerland - one of the most stable economies in Europe - is also fueling the continent's growth story.
The economy grew more-than-expected in the second quarter buoyed by robust private consumption and increased spending on machinery and equipment (read: Play Europe with these Small Cap ETFs ).
Though growth for the second quarter of 0.5% is higher than the market expectation of 0.3%, it is down from 0.6% reported in the first quarter. The construction sector was a slight drag on the economy in the quarter with a 0.3% drop. Further, strength in the Swiss currency (franc) weighed on exports.
Swiss Economic Outlook
The Swiss economy is relatively sound, especially when compared to its neighbors in the region. This is because the country has manageable public debt, enough trade surplus and AAA credit rating.
The Swiss economy is expected to gain momentum at a faster pace in the coming months. The government raised the country's GDP growth outlook from 1.4% to 1.8% for this year and from 2.1% to 2.3% for the next.
The improved outlook comes on robust demand from key Swiss sales markets and improving Euro zone business conditions. Further, there have been some signs of upswing in exports as a recovery in tourism has already started (read: 3 Top Ranked International ETFs Still Worth Buying ).
The unemployment rate of the nation stands at 3.2% as of August, much lower than the neighboring economies, suggesting that Switzerland has been able to do better than most.
Additionally, the country emerged from the state of mild deflation over the past two years in August, with zero inflation, even though deflation was not a problem for the country. The Swiss National Bank (SNB) conducts monetary policy with a focus on maintaining price stability (CPI inflation rate of less than 2 percent).
However, one issue that is linked with this nation is that its currency (Swiss franc) is pegged to the Euro. The SNB intervenes in the foreign exchange markets to maintain the peg 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.
Switzerland ETFs to Consider
Given strong fundamentals, Switzerland has been able to hold up quite well than most European countries so far this year (read: 3 European ETFs Holding Their Ground ). Investors willing to tap the opportunity in this growing economy could choose from the following two ETFs, any of which could be a decent pick.
Both products are clearly outpacing the developed Europe market funds by wide margins in the year-to-date time frame.
iShares MSCI Switzerland Index Fund ( EWL )
This fund provides exposure primarily to large cap Swiss stocks by tracking the MSCI Switzerland 25/50 Index and holds 40 securities in its basket. The product is heavily concentrated across both sectors and securities.
More than two-thirds of the portfolio is allocated to the top three sectors - healthcare, financials and consumer staples. In terms of holdings, the top three firms collectively make up for more than 44%, suggesting that the top firms dominate the returns of the fund (see more in the Zacks ETF Center ).
The fund has amassed nearly $940 million in its asset base. It is relatively cost efficient, charging 50 bps a year while trading nearly 507,000 shares a day. EWL is up nearly 120% in the year-to-date time frame.
First Trust Switzerland AlphaDEX Fund ( FSZ )
This fund provides a slightly active choice as it uses AlphaDEX methodology to select the stock. The methodology seeks to narrow this European space to only the best positioned companies. It ranks the stocks by various growth and value factors, eliminating the bottom ranked 25% of the stocks.
This approach produces a basket of 40 stocks, which is widely spread across each security as none of them holds more than 4.5% of assets. From a sector perspective, financials take the top spot at 33%, closely followed by industrials (25.89%) and health care (13.43%).
The methodology may sound interesting and could lead to outperformance, but this comes with an extra cost of 80 basis points annually. Further, volume is light ensuring extra cost for the product in the form of a wide bid/ask spread. The fund has amassed only $20.7 million in its asset base and gained over 21% so far this year.
These two products have been outperforming the broader European market fund ( VGK ) and the broad U.S. market fund ( SPY ) by wide margins. Currently, we have a Zacks ETF Rank of 3 or 'Hold' rating on both EWL and FSZ (read: all the European ETFs here ).
Given the favorable short-term and long-term outlook for the
nation, these ETFs could make an intriguing choice for investors
seeking to ride out the improving global economic conditions.
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ISHARS-SWITZERL (EWL): ETF Research Reports
FT-SWITZERLAND (FSZ): ETF Research Reports
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