Analyse/UBS ETF (CH) - SMI

Dieser ETF investiert in die grössten Schweizer Aktien. Anleger sollten die Dominanz der drei Schwergewichte Nestle, Novartis und Roche beachten. 

Hortense Bioy, CFA 11.07.2014

Rolle im Portfolio

The UBS ETF (CH) - 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 extremely 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, with a 21-25% weighting, followed by drug makers Novartis and Roche. This inevitably results in high sector concentration, with healthcare accounting for almost 40% of the index's value, while consumer goods and financials combined represent another 45%.

This fund can also be implemented as a tactical tool to overweight Swiss large cap equities within a diversified portfolio.

Additionally, for non-Swiss investors, this fund can 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 ever since –e.g. the SMI was among Europe’s biggest risers in 2013, with a gain of 24%, and the index has kept momentum so far this year (to June 2014).

Looking ahead, Swiss large exporters like Nestle, Richemont and Swatch will continue to benefit from the recovering international demand, especially that coming from Europe –a major trading partner. In 2013, the Eurozone emerged from its longest-ever recession, which saw austerity measures and high unemployment restrict 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 a competitive advantage with their portfolio of patented drugs and robust R&D budgets, which support new drug discovery.

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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 almost 40% of the index's value, followed by consumer goods (27-30%), financials (16-20%) and industrials (8-10%). The index is extremely 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 36-39%.

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The fund uses full physical replication to track the performance of the SMI total return index. The fund holds the securities within the index. The ETF engages in securities lending to help improve its tracking performance. , which serves to generate additional revenue. The net return to the fund was 0.004% for the last 12 month to end June). Data reveals that 4.2% of the fund’s NAV was lent out on average over the last 12 months with a maximum percentage of the total NAV lent on any single day of 24.2%. UBS has capped at 50% the amount of assets that its ETFs are allowed to lend out at any point in time. 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 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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At 0.30%, the fund’s total expense ratio (TER) is in the middle of the range for ETFs tracking the SMI. Additional costs borne by ETF investors but not included in the TER include transaction and rebalancing costs, while revenue from securities lending only marginally helps to offset part of these holding costs. On top of holding costs, ETF investors will typically be charged trading costs, including bid-offer spreads and brokerage commissions, when buy and sell orders are placed for ETF shares.

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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) 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 a fundamentally-weighted alternative with its FTSE RAFI Switzerland ETF. The value tilt of this fund means it is likely to outperform SMI ETFs in rising markets but underperform in falling markets. 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.

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Über den Autor

Hortense Bioy, CFA

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