ETF Showdown: Swiss Beats
Switzerland is known for a few things. The affluent praise Switzerland for its high-end watches and formerly favorable and top-secret banking structure. On the world political stage, Switzerland is most known for its neutrality in major global affairs.
Investors have embraced Switzerland because it is a developed economy that has been a steady hand in a region with precious few of the latter. Still, there are not many ETFs exclusively devoted to the country, just two in fact. The dominant fund is the iShares MSCI Switzerland Index Fund (NYSE: EWL) and the newcomer is the First Trust Switzerland AlphaDEX Fund (NYSE: FSZ).
The First Trust Switzerland AlphaDEX Fund debuted in February and thus far has raked in just $4.5 million in assets under management. That is a far cry from the $575.4 million in AUM held by the iShares MSCI Switzerland Index Fund.
Despite its diminutive stature, FSZ should have something going for it. That being the AlphaDEX methodology, which has proven to efficacious with other First Trust ETFs.
That meanw FSZ is not the run-of-the-mill cap-weighted ETF. Rather, Standard & Poor's builds the index tracked by the ETF by screening "growth factors including 3-, 6- and 12-month price appreciation, sales to price and one year sales growth, and separately on value factors including book value to price, cash flow to price and return on assets. All stocks are ranked on the sum of ranks for the growth factors and, separately, all stocks are ranked on the sum of ranks for the value factors. A stock must have data for all growth and/or value factors to receive a rank for that style,"according to First Trust.
By not using cap weighting, two of the largest Swiss companies Nestle (OTCBB: NSRGY) and Novartis (NYSE: NVS), account for less than three percent of the ETF's weight. On the other hand, that pair represents over 35 percent of EWL's weight. As another example of the stark contrast in weights of holdings, pharmaceuticals giant Roche (OTCBB: RHHBY) receives a weight of 13.4 percent in EWL. The same stock accounts for just 0.83 percent of FSZ's weight.
The sector weights are vastly different as well. FSZ embraces Switzerland's banking heritage with an allocation of 33.5 percent to bank stocks while EWL devotes just under 19 percent of its weight to the same sector. Even with a beta of 1.29 against the S&P 500, EWL is conservatively positioned with a 29.4 percent weight to health care names and a 24.3 percent allocation to consumer staples stocks. Those sectors combine for just over 21 percent of FSZ's weight.
Given the significant differences in sector weights and the composition of the two ETFs is not easy. Both offer exposure to Switzerland, but that is arguably all they have in common. Those willing to trade FBZ should note that ETF has performed better over the past 30 and 90 days.
The risk there is that Swiss equities are near-term overbought in the eyes of some. There are still sound reasons to consider Switzerland for the long haul and investors with a year or more to devote to a Swiss position, should prefer EWL because it is almost 30 basis points cheaper than FSZ and has outperformed its new rival by a wide margin on a year-to-date basis.
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