Rolle im Portfolio
This fund 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, namely Nestle, Novartis, and Roche, accounting for about 60% of the index’s value. This inevitably results in high sector concentration, with healthcare accounting for 38%-42% of the index's value, while consumer goods and financials combined represent another 43%-45%.
This fund can also be implemented as a tactical tool to give an overweighting to 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, arguably one of the world’s most stable and strongest currencies. However, those 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.
Fundamentale Analyse
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, Richemont, or Swatch but also defensive heavyweights like Novartis and Roche, which are able to maintain a competitive advantage with their portfolio of patented drugs and robust R&D budgets that support new drug discovery.
Thanks to their high value-added nature, these companies weathered the global financial and economic crisis better than many others. They also showed resilience to the strong franc, which, driven by its safe-haven status, appreciated considerably after the crisis.
In an effort to contain franc appreciation, support growth, and prevent sustained deflation, the Swiss National Bank introduced a CHF/EUR 1.20 FX peg target in September 2011. In January 2015, the SNB took many by surprise by dropping the peg, and, to discourage Swiss franc appreciation, the bank also cut interest rates to negative 0.75%. This negative rate setup remains in place as of this writing.
Swiss monetary policy settings are likely to be kept in ultraloose mode for a very protracted period, not least given the European Central Bank’s equally ultraloose stance. The Swiss franc, nevertheless, is still too strong and continues to weigh on exporters, especially those that generate most of their sales outside Switzerland but manufacture domestically.
Another source of concern for Swiss companies is the slowdown in emerging markets and particularly China. Swiss companies have increased their exports to China and are now more dependent than ever on its economic growth. The world’s number-two economy continues to post robust growth rates of 6%-7%, but this is lower than what the world had become accustomed to.
Indexkonstruktion
The Swiss Market Index 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 38%-42% of the index's value, followed by consumer staples (22%-25%), financials (16%-20%), and industrials (7%-10%). The index is extremely top-heavy, with Novartis and Nestle accounting for 19%-24% of the index’s value each. The third-largest stock represented is Roche, with a 16%-20% weight.
Fondskonstruktion
The fund uses full physical replication to track the performance of the SMI total return index. The fund holds all the securities within the index. Dividends received from the underlying stocks are invested in the index until distribution date. This dividend treatment helps to minimise tracking error. The ETF engages in securities lending to help improve its tracking performance. The amount of securities that can be lent by an ETF at any point in time is capped at 50% of its net asset value. Lending operations are protected by taking high-quality collateral (for example, G10 government bonds and equities listed on a globally recognised index) greater than the loan value. The level of overcollateralisation is set at 105% for bonds and stocks. Cash is not accepted as collateral. Both loan and collateral values are marked-to-marked daily. State Street Bank, who acts as the lending agent, provides full indemnification to the ETF in case of a borrower failure to return the securities. Gross lending revenue is split as follows: 60% to the ETF, 40% to UBS/State Street Bank, with the latter covering all associated operational costs. The net return to the fund was 0.004% for the last 12 months, while 3.9% of the fund’s NAV was lent out on average and a maximum percentage of the total NAV lent on any single day of 24.2%. It is worth noting that this Switzerland-domiciled ETF is not compliant with UCITS III and therefore is only authorised for commercial distribution in Switzerland and Liechtenstein.
Gebühren
At 0.20%, the fund charges the lowest total expense ratio of all the exchange-traded funds tracking the SMI. It has also been the best performing in recent years, as measured by tracking difference (fund return - index return). Additionally, 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.
Alternativen
IShares and db X-trackers offer alternative SMI ETFs, albeit at higher total expense ratios. They also exhibit wider tracking differences (fund returns - index returns).
As an alternative to SMI ETFs, there is the Amundi MSCI Switzerland ETF, with a total expense ratio of 0.25%, and the UBS MSCI Switzerland ETF, which charges a total expense ratio of 0.20%. 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 mid-cap market.
Those concerned about the high concentration risk embedded in SMI and MSCI Switzerland ETFs could look at ETFs tracking the Swiss Leader Index. The SLI Index consists of the 30 largest and most liquid stocks on the Swiss equity market and has a capping mechanism. The index weighting of the four largest constituents is limited to 9% and the weighting of all other stocks to 4.5%. As a result, this fund has higher weightings in industrials and basic materials. UBS and db x-trackers provide the cheapest options tracking the SLI (strictly in terms of total expense ratio), each sporting a total expense ratio of 0.35%.
Finally, those looking for broader market exposure could consider ETFs tracking the Swiss Performance Index, which is composed of large, mid-, and small caps. The iShares Core SPI (CH) charges a total expense ratio of 0.10%.
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