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Analyse: UBS-ETF SMI

Schweizer Aktien als Fels in der Brandung? Der Konsumgüterhersteller Nestlé dominiert den Index, gilt aber als Profiteur des Wachstums in den Schwellenländern.

Hortense Bioy, CFA 18.07.2013

Rolle im Portfolio

The UBS ETF SMI provides exposure to Swiss large cap stocks, some of which are also the biggest in Europe. As such, this fund can be used as a core holding, but investors should be aware of the peculiarities of the underlying index. The SMI is fairly top heavy, with the top three constituents accounting for about 60% of the index’s value. Nestle, the world’s biggest food company, is the largest stock represented in the index with a 21-25% weighting, followed by drug makers Novartis and Roche. This inevitably results in high sector concentration, with healthcare accounting for more than a third of the index's value, while consumer goods and financials combined represent another 45-50%.           

This fund can also be implemented as a tactical tool to overweight Swiss large cap equities within a diversified portfolio under the belief this market is undervalued given its near-to-medium-term prospects.

For non-Swiss investors, this fund can also serve as a diversifier within a broad pan-European portfolio by providing exposure to the Swiss franc, one of the world’s most stable and strongest currencies. However non-Swiss investors should be mindful that while a strengthening franc will enhance the return of this fund as denominated in their home currencies, a weakening franc will weigh on its performance as measured in their home currency.

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Fundamentale Analyse

Buoyant worldwide demand for Swiss goods supported Switzerland’s economy after the financial crisis, until the appreciation of the Swiss franc--driven by its safe haven status--became a problem, threatening to thwart growth and sink the country into sustained deflation. The persistent strength of the franc prompted the Swiss National Bank (SNB) to set the minimum exchange rate to the euro at 1.20 in September 2011. This shift, effectively a “peg” to the euro, has since changed the role of Swiss franc-denominated assets in investors’ portfolios. That is to say that they’ve somewhat lost their safe haven appeal. 

As of this writing, the cap remains in place and will continue to be enforced by the SNB with “utmost determination” for as long as necessary. Despite bouts of weakness since the cap was introduced, the franc has remained high versus both the dollar and euro. However, Swiss exporters have proven relatively resilient to it, as evidenced by the strong performance of the SMI index in H1-13. The SMI was Europe’s second best performing index after Ireland’s ISEQ, and the world’s fourth best, with a gain of 12.6%--its best start to a year since its creation in 1988.

However, going forward, Swiss large exporters like Nestle, Richemont and Swatch will likely be affected by weaker global growth. Europe --a major trading partner-- is in its longest-ever recession, with austerity measures and high unemployment restricting consumer spending. To offset slowing European consumption, Swiss companies have increased their exports to China and are now more dependent than ever on its economic growth. China is currently the fourth biggest importer of Swiss products behind Germany, the US and Italy. In four or five years, should the current trend continue, China is expected to become the second largest buyer of Swiss products after Germany. But China is slowing down too. Indeed, the world’s No 2 economy continues to post robust growth rates of between 7% and 8%, but these are lower than what the world had become accustomed to.

Overall, the SMI consists of many high-quality companies that boast sustainable competitive advantages, or wide “economic moats”, by virtue of having either exclusive patents or well-recognised brand names. These include not only multinationals like Nestle or Richemont, but also defensive heavyweights Novartis and Roche which are able to maintain their competitive advantages with their portfolio of patented drugs and their robust R&D budgets, which support new drug discovery. Finally, according to Morningstar’s equity analysts, banks like UBS and Julius Baer appear strong, well-capitalised institutions with earnings that are likely to improve materially when Europe's economy picks up.

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Indexkonstruktion

The Swiss Market Index (SMI) is the benchmark index of the Swiss stock market. It is a free-float-adjusted index that comprises 20 of the largest and most liquid stocks listed on the Swiss stock exchange. The SMI represents about 85% of the total capitalisation of the Swiss equity market and its composition is examined once a year. The healthcare sector is the most heavily weighted, representing more than a third of the index's value, followed by consumer goods (27-30%), financials (16-20%) and industrials (8-10%). The index is very top heavy with Nestle accounting for 21-25% of the index’s value. The second and third largest stocks represented are pharmaceutical groups Novartis and Roche, which have a combined weight of 32-37%.

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Fondskonstruktion

The UBS ETF SMI uses full physical replication to track the performance of the SMI total return index (dividends are reinvested gross of fees). The fund holds the securities within the index. The UBS-ETF SMI engages in securities lending, which serves to generate additional revenue. UBS ETFs can lend up to 100% of their assets. For the Swiss ETFs, UBS borrows on a principal basis from the funds. In this case, the ETF has counterparty exposure only to UBS. UBS may then on-lend the securities to a number of different market participants. To protect the fund, UBS provides collateral greater than the loan value on a daily basis into an pool account that is separate from the assets of UBS. Accepted collateral include government securities, liquid equities (with a 15% haircut) and bonds with a minimum rating stipulated by one of the FINMA approved rating agencies. Further concentration limits ensure proper diversification of the collateral portfolio. UBS doesn't currently disclose its revenue sharing arrangement. Dividends received from the underlying stocks are invested in the index until the distribution date. This dividend treatment helps to reduce cash drag. It is worth noting that this Swiss-domiciled ETF is not compliant with UCITS III and therefore is only authorised for commercial distribution in Switzerland and Liechtenstein.

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Gebühren

At 0.35%, the fund’s total expense ratio (TER) is in the middle of the range for ETFs tracking the SMI. Additional costs potentially borne by the fund shareholder but not included in the TER include rebalancing costs, and bid-ask spreads and brokerage fees when buy and sell orders are placed for ETF shares.

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Alternativen

There is no scarcity of options for investors looking to invest in the Swiss equity market. Providers including iShares, db X-trackers and ComStage all offer their own funds tracking the SMI at TERs ranging from 0.25% to 0.50%. However, the iShares SMI (CH) (ex-CS SMI (CH)) is the largest fund tracking the SMI.

Another alternative is the Amundi MSCI Switzerland ETF, which charges a TER of 0.25%. Consisting of 36 stocks, the MSCI Switzerland is larger than the SMI but still very top heavy with the top 10 names accounting for about 90% of the index and very marginal exposure to the Swiss midcap market. 

PowerShares offers an alternative to market cap-weighted funds with its FTSE RAFI Switzerland ETF. The value tilt of this fund means it outperformed all SMI ETFs by almost 3% in 2009 but underperformed each year since then. Those concerned about the high concentration risk embedded in the ETFs that track the SMI or MSCI Switzerland and those looking for broader exposure to the Swiss market could consider ETFs tracking the SLI. The SLI index is made up of the 30 largest and most liquid stocks of the Swiss stock exchange but has a capping mechanism. The weightings of the four largest constituents and all the other stocks are limited to 9% and 4.5% respectively. These caps result in higher exposure to the industrials and basic materials sectors. iShares, UBS and db X-trackers offer ETFs tracking the SLI.

Über den Autor Hortense Bioy, CFA

Hortense Bioy, CFA  is director of passive fund research in Europe.