Update: iShares SMIM

Kühne & Nagel, Lindt & Sprüngli, Schindler und Clariant: Wer auf Schweizer Nebenwerte setzt, investiert in globale Marktfüherer in ihren Segmenten. Der SMIM ist - im Gegensatz zum SMI - zudem auf Einzeltitelebene recht breit diversifiziert.

Hortense Bioy, CFA 19.12.2014
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Rolle im Portfolio

By providing broad exposure to Swiss mid-cap stocks, the iShares SMIM can serve as a tool for asset allocators looking to control their market cap and style exposures. This fund is suitable as a core holding in a Swiss or European equity allocation given its broad holdings across various companies and sectors. The SMIM index is fairly diversified from the perspective of individual stocks, with the top 10 holdings accounting for 52-55% of the index’s weighting. However mid-cap shares tend to be more volatile than blue chips. This fund can also act as a tactical tool to overweight Swiss mid-cap equities within a diversified portfolio. It could be useful for those who want to place a bet on the near-to-medium-term prospects of this asset class as a whole under the belief that they represent good value on a stand-alone basis or as compared to large-cap equities. Non-Swiss investors can also use this fund to gain exposure to the Swiss franc, one of the world’s most stable and strongest currencies. However these investors should be mindful that a strengthening franc will enhance the return of this fund as denominated in their home currencies, but a weakening franc will weigh on its performance as measured in their home currency.

Fundamentale Analyse

Midcap shares are often considered an attractive investment because of their greater growth potential and superior risk/reward profile compared to large cap shares in the medium to long run. This theory has however proven untrue over the medium term in Switzerland, with the SMIM Total Return (TR) underperforming the SMI TR by 0.80 percentage point (pp) on an annualised basis over the last five years (to end November 2014) and by 2.3 pp over the last three years. As expected, the SMIM has also exhibited higher volatility (e.g. 15.1% vs. 13.4% over 5 years) as its constituents tend to be smaller, less diversified and less well-capitalised companies. This leaves mid-caps more sensitive to macroeconomic risks. Notwithstanding, we think that this fund contains strong, solid brand names including highly specialised companies like Schindler and Kuhne & Nagel, which are world leaders in their respective fields.

Buoyant worldwide demand for Swiss goods supported Switzerland’s economy after the financial crisis, until the appreciation of the Swiss franc--driven by its safe haven status--became a problem, threatening to thwart growth and sink the country into sustained deflation. The persistent strength of the franc prompted the Swiss National Bank (SNB) to set the minimum exchange rate to the euro at 1.20 in September 2011. This shift, effectively a “peg” to the euro, has since changed the role of Swiss franc-denominated assets in investors’ portfolios. That is to say that they’ve somewhat lost their safe haven appeal.

As of this writing, the cap remains in place and will continue to be enforced by the SNB with “utmost determination” for as long as necessary. Despite bouts of weakness since the cap was introduced, the franc has remained high versus both the dollar and euro. However, Swiss exporters have proven relatively resilient to it, as evidenced by the strong performance of the SMIM index ever since. So far in 2014 (to end November), the Swiss benchmark has been among the world’s biggest risers, with a gain of 14.5%.

Looking ahead, Swiss exporters should continue to benefit from the recovering international demand, barring that from Europe –a major trading partner– in the nearer term. Growth in the Eurozone will remain sluggish, with the European Central Bank expecting only 1% GDP growth in 2015. To offset slowing European consumption, Swiss companies have increased their exports to China and are now more dependent than ever on its economic growth. China is currently the fourth biggest importer of Swiss products behind Germany, the US and Italy. In three or four years, should the current trend continue, China is expected to become the second largest buyer of Swiss products after Germany. But China is slowing down too. Indeed, the world’s No 2 economy continues to post robust growth rates of between 7% and 8%, but these are lower than what the world had become accustomed to.


The SMIM index (SMI Mid) comprises the 30 largest mid-cap stocks on the Swiss equity market that are not included in the blue chip SMI index. As in the case of the SMI, it is free-float-capital weighted and the components are selected according to market capitalisation and turnover. Financials and industrials are the most heavily weighted sectors, representing 23-27% of the index's weighting each, followed by consumer goods (18-21%) and healthcare (10-14%). Sonova, Aryzta, Sika, and Kuhne & Nagel are among the top constituents, with a 5-7% weighting each.


The fund uses full physical replication to track the performance of the SMIM index on a total return basis. The fund may engage in securities lending but at the time of this writing no information related to it was made available on the company website. While securities lending can help generate additional revenue, it also introduces counterparty risk. To protect the fund, the borrowers are requested to post collateral. Dividends (including withholding receivables) are reinvested in both the SMIM constituents and index futures depending on the amount and timeframe until the next distribution date. It is worth noting that this Swiss-domiciled fund is not compliant with UCITS and therefore is only authorised for commercial distribution in Switzerland and Liechtenstein.


The fund levies a 0.45% total expense ratio, which is at the top end of the range for ETFs tracking the SMIM. Moreover, the tracking difference (fund return - index return) over the last few years suggests that the total holding cost is higher than the TER. On top of holding costs, 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.


Investors seeking a cheaper alternative (speaking strictly in terms of TER) to this fund can turn to the UBS SMIM ETF, which has a TER of 0.26%. It also carries a lower total holding cost, as measured by historical tracking difference. However, this lower cost may potentially come at the expense of lower liquidity. The iShares SMIM (CH) (ex-CS SMIM ETF) is the oldest and largest ETF offering exposure to the Swiss midcap equity market.

Alternatively, those interested in the large-cap shares segment of the Swiss market could consider ETFs tracking the SMI index or SLI index.

The SMI comprises 20 of the largest and most liquid stocks listed on the Swiss stock exchange. Providers including iShares, UBS, db X-trackers and ComStage offer an SMI ETF at TERs ranging from 0.20% to 0.39%.

The SLI comprises the 30 largest and most liquid stocks on the Swiss stock exchange. It has a capping mechanism, whereby the index weighting of the four largest constituents is limited to 9% and the weighting of all other components to 4.5%. This capping mechanism provides stock and sector diversification. The iShares SLI (CH) has a TER of 0.40%. UBS and db X-trackers also offer ETFs on the SLI for a TER of 0.35%.


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Über den Autor

Hortense Bioy, CFA

Hortense Bioy, CFA  is director of passive fund research in Europe.