Analyse: UBS-ETF SMI

Dieser physisch replizierende ETF bietet Anlegern Zugang zum Schweizer Leitindex, der von Giganten wie Nestlé, Novaris und Roche dominiert wird. 

Hortense Bioy, CFA 17.10.2012

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 appreciation of the Swiss franc--driven by its safe haven status--became a problem. The persistent strength of the currency prompted the Swiss National Bank (SNB) to set the minimum exchange rate of the euro at 1.20 francs in September 2011. This shift, which resulted effectively in a “peg” of the currency 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.

A year later, the cap is still in place and will continue to be enforced by the SNB with the utmost determination as long as it is necessary. While the recent measures taken by the European Central Bank to tackle the euro-zone crisis have helped to ease pressure on the Swiss franc, the currency remains strong and is weighing on the Swiss economy. A strong franc is especially detrimental to exporters who see their selling prices and profit margins squeezed.

Another concern for exporters such as Nestle, Richemont and Swatch is the ongoing European sovereign debt crisis. Lingering uncertainty over its permanent resolution continues to depress consumer confidence and restrict spending in Europe. To offset slowing European consumption, Swiss companies have increased their exports to China and are now more dependent than ever on the latter’s economic growth. China is currently the fourth biggest importer of Swiss products behind Germany, the US and Italy. In 4 or 5 years, should the current trend continue, China is expected to become the second largest buyer of Swiss products after Germany.

Meanwhile, the Swiss financial sector has become less of a concern as of late. According to Morningstar’s equity analysts, the nation’s three largest banks, namely Credit Suisse, UBS and Julius Baer appear strong, well-capitalised institutions with little direct exposure to ailing European sovereigns and with earnings that are likely to improve materially when Europe's economy stabilises.

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 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. 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. 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.


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.