Watches, chocolate, cheese. Switzerland is famous for quality on all three, but perhaps more attention should also be paid to the many high-quality, blue-chip, large-cap companies which are based there, such as Novartis, Roche, and Nestle. One relatively efficient way for investors to gain investment exposure to such companies is through the iShares MSCI Switzerland Index Fund Ticker:(EWL), $21.40 at close of market on July 14), which sports S&P's highest Overall ETF ranking of “Overweight”. Standard & Poor's believes that EWL features attractive underlying holdings and also offers a measure of safety, by virtue of low volatility, a reasonable dividend yield, and outsized exposure to relatively defensive sectors of the global economy.
In selecting this month's Featured ETF, S&P screened for equity ETFs that scored positively for performance analytics and risk, as well as a positive overall ranking (which factors in considerations for cost). The screening criteria also included a requirement for a dividend yield of at least 1.5% (to focus on ETFs with higher quality holdings), and, given rising volatility in uncertain times, required an ETF to have a beta no higher than 0.90. The beta is a measure of volatility; a beta no higher than 0.90 implies the ETF has volatility that is at least 10% below the market overall. While Standard & Poor's did not specify a style requirement in this screen, there was a general preference for ETFs with large-capitalization names, given that such names are typically higher quality.
Based on an evaluation of the underlying ETF holdings, Standard & Poor's classifies EWL as an Equity-Europe Developed Markets ETF security, and approximately 84% of its holdings as of April 30 qualify as large cap. Thirty-seven Swiss companies comprise virtually all of this security's assets. The security itself has total assets of $370 million and average trading volume near 227,000, as of July 8, 2010.
Like many of today's equity ETFs, EWL is aimed at providing investment returns that are generally similar to those of the stocks in an equity index. In the case of EWL, BlackRock iShares says that this ETF is designed to track those stocks in the MSCI Switzerland Index. This ETF has an inception date of March 12, 1996 and it has 18.3 million shares outstanding. The gross expense ratio for EWL is 0.56%.
Stock markets in the developed world faced stiff resistance in the first half of 2010, with most key country or regional indices yielding negative capital appreciation. However, Switzerland outperformed a key peer benchmark. Overall, the MSCI Switzerland Index is down 7.1% YTD through July 8, denominated in US dollars, but the EAFE Index (which covers the developed world in Europe and Asia) is down a larger 10.8%. Yet on a forward-looking basis, the MSCI Switzerland Index is trading at 11.7 times consensus 2010 profit estimates, about a 5% discount to the EAFE's corresponding multiple of 12.4.
S&P's International Equity Strategist Alec Young currently favors Switzerland given ongoing sovereign risk emanating from Southern Europe. Young notes “Switzerland's extremely counter cyclical sector composition produces a below average risk profile that Standard & Poor's believes is timely given the current heightened potential for European growth disappointments.”
A strategic investment in EWL, judging by the sectors it focuses on, is by extension a defensive play. Based on holdings data as of July 8, two relatively defensive sectors (health care and consumer staples) combine for 57% of EWL's total assets. Financial companies, such as top 10 holdings like Credit Suisse Group and UBS, comprise another 21%. Meanwhile, three cyclical sectors (industrials, materials, and energy) combine for a mere 16% of EWL's portfolio. Looking at individual industries, the top five industries are pharmaceuticals, packaged foods & meats, diversified capital markets, multi-line insurance, and apparel, accessories & luxury goods; combined, these five industries comprise 66% of EWL's total assets.
EWL has a current beta of just 0.87 and a beta since inception of just 0.73, indicative, in the view of Standard & Poor's, of the large-cap, defensive nature of EWL's holdings. As of July 8, 2010, the top three holdings comprised 44% of total assets, and the top 10 holdings comprised 73% of total assets. The top holding, Nestle (19.3% of total assets) is ranked “hold” by S&P Equity Research, but the 2nd and 3rd biggest holdings, Roche (13.1%) and Novartis (11.4%) are both ranked as “buys”. Overall, amongst the top 10 holdings, S&P Equity Research ranks two as “strong buys”, five as “buys” and three as “holds”.
As for risk considerations, S&P ranks EWL with an “Overweight”, noting that EWL benefits from an above-average score on standard deviation, and neutral scores for the proprietary S&P Quality Rank, and proprietary S&P Credit Rating. (The S&P Quality Rank assesses the growth and stability of a company's earnings and dividends over the past 10 years.)
As for cost factors, EWL's ranking in this category – “Marketweight” – reflects neutral scores on gross expense ratio and on bid-ask spread, but suffers from a disadvantageous price to net asset value.
In conclusion, EWL is one of approximately 127 equity ETFs on which S&P had an overall “overweight” ranking on July 8, 2010. S&P believes EWL has compelling characteristics as it relates to performance, risk and cost factors.