Switzerland ETF Sort of Stable, But Currency Is An Issue

Switzerland is often see as a beacon of economic stability in what can a volatile European scene, but the Swiss franc always looms large for investors considering Swiss equities. Franc strength often weights on Swiss stocks, particularly when the currency is prized as a safe-haven and when gold prices are rising.

Unfortunately for the iShares MSCI Switzerland Capped ETF EWL, the largest U.S.-listed exchange traded fund tracking Swiss stocks, the CurrencyShares Swiss Franc Trust FXF is 4.7 percent year-to-date. That makes FXF one of the best-performing developed market currency ETFs and that showing helps explain why EWL is lower by 3.2 percent.

That is despite the Swiss National Bank's (SNB) best efforts to suppress the franc. Switzerland is one of the negative interest rate nations and the good news for the Swiss economy is that the euro is higher against the franc over the past year. FXF measures the U.S. dollar against the Swiss currency. With the Eurozone being a primary destination for Swiss exports, the franc's strength or lack thereof against the euro is usually a tell regarding Swiss equities.

In other good news, Switzerland remains one of the AAA-rated countries, largely viewed as stable by major ratings agencies.

“Switzerland's 'AAA' rating reflects its track record of prudent economic and fiscal policies, a diversified and wealthy economy, and high levels of human development. Switzerland surpasses its 'AAA' peers on most key indicators. GDP per capita is 1.5x the 'AAA' median. General government gross debt is low (34.4% of GDP estimated for 2015) and the government runs a small budget surplus. An estimated net external creditor position of 159% of GDP in 2015 is underpinned by a history of current account surpluses and the Swiss franc's status as a global reserve currency,” said Fitch Ratings in a recent note. 

Although the EUR/CHF pair is more meaningful to Swiss equities than USD/CHF, that does not diminish EWL's exposure to USD/CHF weakness. The $1.2 billion ETF holds just 39 stocks, many of which are levered to the Swiss export story.

That is especially true at the sector level where EWL devotes more than 51 percent of its combined weight to the healthcare and consumer staples sectors. EWL's top 10 holdings include Nestle AG NSRGY, Roche Holdings and Novartis AG NVS. The benefit is that EWL sports a trailing 12-month dividend yield of almost 2.9 percent, which given the ETF's three-year standard deviation of less than 12.5 percent is a good trade-off. 

“Fitch expects the Swiss economy to recover from the impact of the franc's appreciation against the euro in 2015. We forecast GDP growth of 1.2% in 2016 and 1.7% in 2017, up from 0.9% in 2015. These forecasts assume robust private consumption and an uptick in investment. We expect low interest rates and lower oil prices to further support higher real wages. Sustained demand for Swiss goods and modest recovery in the eurozone will spur investment in the export-oriented sectors and rising property prices and low interest rates will also likely support investment in the housing and construction sector,” adds Fitch.