The Swiss National Bank’s (SNB) decision last Thursday to scrap the franc’s peg to the euro caught scores of market participants off-guard and the impact was felt across the exchange traded funds landscape.
Although the CurrencyShares Swiss Franc Trust (NYSEArca: FXF) jumped 18.5% in last week’s last two trading sessions, the effects of a stronger Swiss currency not done being felt. Income investors that have embraced international ETFs, such as the iShares MSCI Switzerland Capped ETF (NYSEArca: EWL) and the Vanguard FTSE Europe ETF (NYSEArca: VGK), on the basis of those ETFs’ large exposure to Swiss dividend stocks might be forced to reassess those positions because payouts in one of Europe’s most dependable dividend markets could come under fire due to the surging franc. [Investors Left Swiss ETFs too Soon]
“The payout ratio will jump from an already high level (54%), and soon we would expect Swiss companies to talk about dividend cuts,” said Societe Generale in a research note published last Friday, a day after the SNB announcement.
EWL, the largest Switzerland ETF, allocates 20% of its weight to the financial services sector, including a 3.2% allocation to Credit Suisse (NYSE: CS).
Unfortunately for dividend investors that were mulling allocations to Switzerland-heavy ETFs, the potential for dividend cuts does not begin and end with Credit Suisse and EWL.
“Companies such as big pharma’s Novartis and Roche as well as Adecco, the world’s biggest staffing firm by sales, generate more than 95 percent of their sales from abroad, according to Morgan Stanley,” reports Reuters.
Novartis and Roche combine for 29% for EWL’s weight and are marquee holdings in ETF’s such as VGK and the iShares Europe ETF (NYSEArca: IEV). Concerns about reduced Swiss dividends at the hands of a stronger franc run counter to Switzerland’s normally dependable status as a European dividend growth destination.
For example, it is expected that Swiss dividends grew over 8% last year, led by Nestle (OTC: NSRGY), Novartis and Roche. [ETFs for Europe’s Rising Dividends]
Estimates indicate that in 2014, the 20 largest firms listed on Switzerland’s benchmark Swiss Market Index paid a record $37.2 billion in dividends. Another important fact for income investors to consider: Swiss dividends are top heavy, meaning the five largest SMI member firms accounted for 70% of the country’s payouts last year. Those companies, including Nestle and Novartis, are among the Swiss companies must often found in U.S.-listed diversified Europe ETFs.
The $1.44 billion iShares Global Healthcare ETF (NYSEArca: IXJ) allocates over 11% of its combined weight to Novartis and Roche while the First Trust Switzerland AlphaDEX Fund (NYSEArca: FSZ) has a combined weight of 6.9% to Adecco, Novartis, Nestle and Roche.
iShares MSCI Switzerland Capped ETF