Market Overview

Falling Franc Super For Switzerland ETFs

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Falling Franc Super For Switzerland ETFs
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Ample adulation is being heaped upon Europe exchange-traded funds this year and rightfully so. Not only are European stocks attractively valued when measured against the S&P 500 and other U.S. equity benchmarks, but equities across the pond are rewarding investors faith with significant upside.

Add to that, investors are flocking to Europe ETFs in droves. Switzerland should not be lost in that equation. Whether investors realize it or not, Switzerland is usually a major country weight in diversified Europe ETFs that are not dedicated Eurozone funds. In the case of some of the popular broad-based Europe ETFs, Switzerland is usually the second- or third-largest country weight and can sport allocations of close to 15 percent in these funds.

A direct avenue to steady Swiss stocks is the iShares MSCI Switzerland Index Fund(ETF) (NYSE: EWL), the largest and oldest US-listed Switzerland ETF.

Faltering Franc, Rising Stocks

The Swiss economy is heavily dependent on exports, particularly to other developed markets. In other words, Swiss equities can and do benefit from a weak franc. That is happening this year as EWL is up nearly 17 percent, good for one of the best performances among single-country Europe ETFs, while the CurrencyShares Swiss Franc Trust (NYSE: FXF) is lower by 7 percent.

Several years ago, the Swiss National Bank (SNB) was one of the first central banks to employ negative interest rates, a policy that is maintained to this day. That has kept a lid on franc upside to the point that some market observers believe the SNB does not need to do much more to suppress the currency.

“Major central banks across Europe are hinting at unwinding monetary policy stimulus, leaving the SNB among a shrinking dovish camp. UBS Group AG and Nomura Holdings Inc. predict further downside for the Swiss currency, after it broke through a key technical level at 1.10 per euro on Monday and dropped to its lowest since June 2016,” reports Bloomberg.

Although yields on developed market debt are not appealing, EWL yields about 2.2 percent and its three-year standard deviation of 12.4 percent implies less volatility than is found on other Europe single-country ETFs.

Betting On A Fall

EWL is not a currency hedged ETF, so investors are taking on some element of currency risk, particularly if the franc stays mired in its current slump. This is an important consideration with EWL allocating 51 percent of its combined weight to Swiss consumer staples and healthcare names, many of which depend on foreign markets for substantial portions of their sales.

Additionally, the SNB sees the franc as overvalued and traders are betting on more downside for the currency.

“Options bets signaled expectations for a fall, with the premium for one-week calls on the euro against the franc relative to puts at the highest since February 2016 on a closing basis,” according to Bloomberg.

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