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Switzerland ETFs in Focus on China FTA Deal

EWL FSZ FXF

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Switzerland, unlike many other European economies, has maintained a budget surplus and a credit rating of 'AAA'. The unemployment rate of the nation is also much lower than the neighboring economies, suggesting that Switzerland has been able to do better than most (5 ETFs for Countries with Highest Employment Rates).

Yet, that doesn’t mean that Switzerland is resting on its laurels, as the nation is looking to improve its export level and market diversification, with negotiations with China for a free trade agreement. The deal which is still subject to approval of the parliament, but it is expected to benefit various companies of the country.

The removal of Chinese duties will especially benefit the chemical industry, the engineering sector, food producers and watchmaking.

The deal under negotiation for three years now is finally set to reach fruition. China is already the sixth largest export market for Switzerland and the deal will benefit the European country further.

Swiss companies like Swatch, Richemont and Shindler will stand to gain from the deal as Chinese tariffs would be lowered. China is the third biggest export market for Swiss watches and the deal will fortify the position of Swiss watch companies in China.

Currently, imported goods from Switzerland are charged an 11% import duty and luxury watches, worth more than 10,000 yuan (1,500 Swiss francs), are subject to a 20% levy (Switzerland ETF Investing 101).

Luxury watchmaker Swatch has 20% exposure to China while Richemont is 10% exposed to the country. Although the exact reduction in duty is still left to be disclosed, this will surely benefit these companies with heavy exposure in China.

This will also help to offset the impact of reduction in Swiss watch sales in Asia in the first three months of 2013. The country witnessed a reduction in sales as a crackdown on corruption intensified.

According to the Swiss Watch Industry Federation, overall Swiss watch exports will likely increase between 4% and 6% in 2013, down from 11% in 2012 and near 20% gains in 2010 and 2011.

With only a few weeks left for the deal to finally reach fruition, investors may opt to invest in Swiss stocks. Instead of investing in single companies, going via a basket approach may prove to be beneficial for an investor.

Investors who look to capitalize on the benefits that Swiss companies will reap from the deal can look to invest in the following ETFs (ETFs for the Most Competitive Countries on Earth).

iShares MSCI Switzerland Index Fund (EWL)

Launched in March 1996, EWL is linked to the MSCI Switzerland Index. The Index has been designed to measure the performance of the Swiss equity markets. The index is a float adjusted, market capitalization weighted index which mostly consists of publicly traded large cap stocks.

The fund manages an asset base of $650 million and trades with volume levels of more than 400,000 shares a day. The average bid ask ratio stands at 0.06% so total trading costs will be quite low overall.

EWL provides exposure to 40 Swiss securities which mostly cover the large cap section of the market spectrum. The fund appears to be highly concentrated in its top 10 holdings as nearly 73% of the asset base goes towards those stocks.

Drilling down further into the top ten, the top three holdings in the fund play a dominant role in its performance, as more than 45% of the asset base is invested in these firms. The first three holdings are occupied by Nestle, Roche Holdings and Novartis. Among others, the fund does not invest more than 5%.

For sectors, the fund appears to be heavily invested in health care (Biotechnology ETF Investing 101). EWL allocates 29.2% of the asset base to the sector.

Other than this, the fund assigns double-digit allocation to consumer staples, financials and industrials. Among others, the fund does not invest more than 8.25%.

In the last one year, the fund has done a good job delivering a return of 20.7% while year-to-date gains stand at 15.04%. The fund charges a fee of 52 basis points annually from investors and has generated a yield of 2.58% in the process.

First Trust Switzerland AlphaDEX Fund (FSZ)

Launched in February 2012, First Trust Switzerland AlphaDEX Fund (FSZ - ETF report) is the latest addition to the Swiss ETF line-up.

FSZ is a passively managed ETF designed to track the performance of the Defined Switzerland Index, an index consisting of the stocks selected on the basis of the AlphaDEX screening methodology.

The AlphaDEX methodology for selecting stocks uses both growth and value factors for determining the stocks to be included in the fund. In this way, investors get a blend of both growth and value stocks in one fund.

The methodology may sound interesting and could lead to outperformance, but this comes with a high cost of 80 basis points annually.

Unlike its iShares counterpart, the fund has not been that popular among investors as indicated by the trading volume of just 6,000 shares a day on average. Since its inception, the fund has been able to amass an asset base of $16.1 million.

The ETF seeks to invest its asset base across the market spectrum with a slight tilt towards smaller securities. Among mid caps and large caps, the fund appears to be equally spread out.

The fund appears to be moderately concentrated in the top 10 holdings in which it allocates 40% of the asset base.

In terms of sector allocation, financials dominates the holding pattern with double-digit allocation of 33.32%. Industrials, materials and consumer discretionary also get double-digit allocation in the fund. (Two Sector ETFs to Buy in 2013).

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