Swiss Miss: Switzerland Skirts Recession, But ETFs Struggle

A large number of diversified developed markets exchange traded funds have exposure to Swiss stocks with Switzerland often being one of the largest country weights following the U.K. and Japan in those funds. So it should be good news that Switzerland surprisingly avoided a recession in the second quarter.

The Swiss economy posted second-quarter GDP growth of 0.2 percent after contracting by the same amount in the first quarter, according to Bloomberg. Two consecutive quarters of contracting economic growth marks recessions. Data indicate Switzerland was able to avoid that fate, but ETFs such as the iShares MSCI Switzerland Capped ETF (NYSE: EWL) and the First Trust Switzerland AlphaDEX Fund (NYSE: FSZ) still face headwinds.

While August has been full of shocks to the foreign currency market with a steady stream of developing countries devaluing their currencies, it should be remembered that back in January, Switzerland fired the first shot in the 2015 global currency war. That is when the Swiss National Bank scrapped the franc's peg to the euro in a bid to defend the country's exporters. 

Problem is the CurrencyShares Swiss Franc Trust (NYSE: FXF) is up 2.2 percent this year. That ETF tracks dollar/franc movements, so the real problem is the franc's double-digit gain against the euro.

EWL, the larger of the two Switzerland ETFs, is a cap-weighted fund and thereby reflective of local Swiss equity exchanges in that fund is dominated by Nestle SA (PK: NSRGY), Novartis AG (NYSE: NVS) and Roche Holdings. Those three stocks, each of which has significant export exposure, combine for 45 percent of EWL's weight.

Looking at EWL another way, the ETF devotes almost 32.2 percent of its weight to health care stocks, with Novartis and Roche commanding the bulk of that allocation. That sizable health care exposure should be an advantage this year with the sector soaring, but the strong franc has sent EWL to a six-month loss of just over four percent.

FSZ, the smart beta spin on Swiss stocks, has not been anything to brag about over that period, either. FSZ's 40 holdings are ranked “on 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. 

In a more sanguine currency environment, that methodology could prove advantageous, but although FSZ devotes 35 percent of its weight to Swiss financial services names, the ETF is still levered to the franc via a combined 46 percent weight to the export-heavy industrial, health care and consumer discretionary names.