Analyse: UBS-ETF SMI

SMI-ETF weist mit Nestlé, Novartis und Roche hohe Konzentrationsrisiken auf - wartet aber zugleich mit vielen Weltmarktführern auf.   

Hortense Bioy, CFA 28.06.2012
Rolle im Portfolio

The UBS-ETF SMI provides exposure to Swiss large-capitalisation equities and can be used as a core holding for investors looking to build a Swiss-centric portfolio. However, investors should be aware that the SMI is very top heavy, with the five largest constituents accounting for about 70% of the index’s value. This means that price fluctuations in those shares have a substantial impact on the index’s value. Nestle, the world’s biggest food company, is the largest stock represented in the fund with a 25% weighting, followed by drug makers Novartis and Roche. Consequently, the CS ETF (CH) on SMI also has a high degree of sector concentration, with healthcare being the top sector with a 35% weighting, followed by consumer goods and financials, which combined represent another 50% of the portfolio. 

This fund can also be implemented as a tactical tool to overweight Swiss equities within a diversified portfolio. It could be useful for those who want to place a bet on the near-to-medium-term prospects of the Swiss market under the belief that the benchmark index is undervalued. 

For non-Swiss investors, this fund can also serve as a diversifier within a broad pan-European portfolio by providing exposure to one of the world’s most stable and strongest currencies. Over the past five years, the SMI has shown an 85% correlation to the widely-held EURO STOXX 50. By comparison, the DAX and CAC 40 have both exhibited a correlation around 98% to the EURO STOXX 50 over the same period. This lower correlation is primarily because Switzerland is not a member of the European Monetary Union. However non-Swiss investors should be mindful that a strengthening franc will enhance the return of this fund as denominated in their home currencies, but a weakening franc will weigh on its performance as measured in their home currency. 

Fundamentale Analyse

Buoyant worldwide demand for Swiss exports supported Switzerland’s economy after the financial crisis, until the persistent strength of the Swiss franc became a problem. Driven by its safe haven status, the currency appreciated so much that the Swiss National Bank (SNB) set the minimum exchange rate of the euro at 1.20 francs. This shift--resulting effectively in a “peg” of the currency against the euro--has dramatically changed the role of Swiss franc-denominated assets, like this fund, in investors’ portfolios, which have tended to be seen as safe haven assets. That said, the pressure on the currency remains high and it is not clear whether the central bank will have the strength to sustain its action over the long term, especially if the situation in the eurozone continue to deteriorate. The SNB recently said the franc is still highly valued and detrimental to exporters who see their selling prices and profit margins squeezed. 

An even bigger concern for consumer goods exporters like Nestle, Richemont and Swatch is the lingering uncertainty about the resolution of the European sovereign debt crisis, which continues to depress consumer confidence and restrict spending. These companies are now more dependent than ever on the growth in China to offset slowing European consumption.

Financial groups, including UBS and Credit Suisse, also remain particularly  vulnerable in the current environment as they could face substantial losses from their capital market businesses in the market turbulence.

That said, 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 Unilever 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. 

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 (30-31%), financials (16-20%) and industrials (8-10%). The index is very top heavy with Nestle accounting for 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 over 30%.

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. Currently, the UBS-ETF SMI doesn't engage in securities lending, which means that the fund doesn't carry any counterparty risk. 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 ETF is not compliant with UCITS III and therefore is only authorised for commercial distribution in Switzerland and Liechtenstein.

Gebühren

At 0.35%, the fund’s total expense ratio (TER) is in the middle of the range for ETFs tracking the SMI.

Alternativen

There is no scarcity of options for investors looking to invest in the Swiss equity market. Providers including Credit Suisse, ComStage, iShares and db x-trackers offer their own ETFs tracking the SMI at TERs ranging from 0.25% to 0.52%. The CS ETF (CH) on SMI is the largest fund tracking the SMI traded on the Swiss exchange. It is also the most liquid as measured by its trailing 3-month average daily trading volume. As an alternative to an ETF tracking the SMI, Amundi provides a Paris-listed ETF that tracks the MSCI Switzerland, which has a TER of 0.25%. This fund, which has 36 holdings, offers very marginal exposure to the Swiss midcap market. The fund is still very top heavy with the 10 top holdings accounting for about 90% of the index. Those concerned about the high concentration risk embedded in ETFs tracking the SMI and MSCI Switzerland indices and those looking for broader market exposure could consider investing in an ETF that tracks the SLI. The Swiss Leader Index is comprised of the 30 largest and most liquid stocks on the Swiss equity market and has a capping mechanism. The weighting of the four largest constituents is limited to 9% and the weighting of all other stocks to 4.5%. As a result, the SLI has higher allocations to the industrials and basic materials sectors. The SLI outperformed the SMI by 8% in 2009 and 4.6% in 2010, albeit with a higher level of volatility. UBS, Credit Suisse and db x-trackers offer ETFs tracking the SLI, sporting TERs between 0.35% and 0.40%.

Über den Autor Hortense Bioy, CFA

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