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Swiss Miss: Switzerland Skirts Recession, But ETFs Struggle

A large number of diversified developed-markets exchange-traded funds have exposure to Swiss stocks, with Switzerland often being one of the largest country weights following the U.K. and Japan in those funds. So, it should be good news that Switzerland surprisingly avoided a recession in the second quarter.

The Swiss economy posted second-quarter GDP growth of 0.2 percent after contracting by the same amount in the first quarter, according to Bloomberg. Two consecutive quarters of contracting economic growth marks recessions.

The Swiss Situation

Data indicate Switzerland was able to avoid that fate, but ETFs such as the iShares MSCI Switzerland Index Fund(ETF) (NYSE: EWL) and the First Trust Switzerland AlphaDEX ETF, First Trust Exchange Traded AlphaDEX Fund II (NASDAQ: FSZ) still face headwinds.

Related Link: Is There Consumer Inflation In Switzerland?

While August has been full of shocks to the foreign currency market with a steady stream of developing countries devaluing their currencies, it should be recalled that back in January, Switzerland fired the first shot in the 2015 global currency war. That is when the Swiss National Bank scrapped the franc's peg to the euro in a bid to defend the country's exporters.

The problem is, the Guggenheim CurrencyShares Swiss (NYSE: FXF) is up 2.2 percent this year. That ETF tracks dollar/franc movements, so the real problem is the franc's double-digit gain against the euro.

A Closer Look At EWL

EWL, the larger of the two Switzerland ETFs, is a cap-weighted fund, and thereby reflective of local Swiss equity exchanges in that fund, dominated by Nestle SA Reg Shs. Ser. B Spons (ADR) (OTC: NSRGY), Novartis AG (ADR) (NYSE: NVS) and Roche Holding Ltd. (ADR) (OTC: RHHBY). Those three stocks, each of which has significant export exposure, combine for 45 percent of EWL's weight.

Looking at EWL another way, the ETF devotes almost 32.2 percent of its weight to healthcare stocks, with Novartis and Roche commanding the bulk of that allocation. That sizable healthcare exposure should be an advantage this year with the sector soaring, but the strong franc has sent EWL to a six-month loss of just over 4 percent.

A Closer Look At FSZ

FSZ, the smart beta spin on Swiss stocks, has not been anything to brag about over that period, either. FSZ's 40 holdings are ranked “on growth factors including three-, six- and 12-month price appreciation, sales to price and one year sales growth, and separately on value factors including book value to price, cash flow to price and return on assets. All stocks are ranked on the sum of ranks for the growth factors and, separately, all stocks are ranked on the sum of ranks for the value factors. A stock must have data for all growth and/or value factors to receive a rank for that style,” according to First Trust.

In a more sanguine currency environment, that methodology could prove advantageous, but although FSZ devotes 35 percent of its weight to Swiss financial services names, the ETF is still levered to the franc via a combined 46 percent weight to the export-heavy industrial, healthcare and consumer discretionary names.

Image Credit: Public Domain

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