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In The Search For Safety, Don't Miss The Swiss

ETF Professor

Investors looking to add some European exposure to their portfolios without incurring significant headline risk and volatility may want to consider Switzerland. Several large-cap Swiss stocks trade in the U.S., and investors here can access Swiss equities in basket form via the iShares MSCI Switzerland ETF (NYSE: EWL).

What Happened

The iShares MSCI Switzerland ETF, the largest U.S.-listed exchange traded fund dedicated to Swiss stocks, is up more than 15 percent year-to-date, putting the fund ahead of the S&P Europe 350 Index and the MSCI EAFE Index. Switzerland is part of both of those benchmarks.

Home to 39 stocks, EWL has a three-year standard deviation of just under 11 percent, a level of volatility that is often reserved for broad U.S. equity benchmarks. With Sino-American trade tensions again concerning global market participants, investors may want to revisit Switzerland's investment opportunities.

Why It's Important

“Last Friday, in local currency terms, the Swiss Market Index (SMI) broke out of a 12-year base to new all-time highs, including more than 2% above the pattern under review – long-term resistance,” Rareview Macro founder Neil Azous said in a Monday note.

As is the case with many single-country ETFs, the $1.03-billion EWL is a top-heavy fund. Nestle SA (NYSE: NSRGY), Roche Holding (NYSE: RHHBY) and Novartis AG (NYSE: NVS) combine for over 42 percent of the fund's weight.

The fund's low volatility reputation is derived from its sector exposures, including a combined 51.81-percent weight to the defensive health care and consumer staples sectors. As noted by its impressive year-to-date performance, EWL is sharply outperforming basic U.S. health care ETFs this year.

“At the micro level, the starting point for ~45% of the index is also supportive for a long position,” said Azous.

"The top three holdings in the SMI are: Nestle SA (19.8%), Roche Holding AG (11.45%), and Novartis AG (11.03%). Nestle remains an activist stock. European healthcare has stronger tactical fundamental signals than US healthcare because of policy risk."

What's Next

EWL has a trailing 12-month dividend yield of 2.28 percent, about 40 basis points above the comparable yield on the S&P 500. That coupled with differentials between the dollar and Swiss franc could lure traders to Swiss assets.

“That gain, in turn, is effectively added to whatever you invest those Swiss francs in, be they bonds, stocks or credit,” said Azous. "The result can materially boost the income a US dollar investor receives if they buy overseas assets and remove the currency exposure.”

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