EWL - EWL Is A Mediocre Blue-Chip Europe Exposure

Summary

• EWL captures a general feeling of the European economy focusing on companies that are technically Swiss in that they're listed on the Swiss exchange.
• These stocks wouldn't necessarily be our choice in the current environment. Some are very blue-chip but others have problems.
• Overall, there are points of resilience, but for a European 'blue-chip' skewed ETF, it's not that great.

The iShares MSCI Switzerland Capped ETF ( EWL ) is a European ETF that focuses on some of the more well-known blue-chip exposures. The Swiss element is wholly irrelevant, and the only Swiss element that connects these stocks is that they all trade on Swiss exchanges, often among others. It's a small ETF, so are the top holdings that drive the portfolio so great in the current environment? Not really. There's nothing too compelling here with this ETF.

EWL Breakdown

Let's have a look at the top holdings.

The big holdings begin with Nestle ( OTCPK:NSRGY ) at 21%. Nestle is one of the broadest consumer staples companies out there. Its wallet share geographically is very broad, with the US being 30% but the rest of the exposures spread out broadly across the world. Beverages, premade foods, dairy and consumer food products categorised as nutrition products make the bulk of the revenues. They also do pet food, where pet ownership has risen a lot since the pandemic - more than doubled in the US apparently . These are pretty solid categories, but there's always a downtrading risk with a pressured macroeconomic environment. The cash flows aren't completely rock solid, yet the company is valued at an earnings yield below risk-free rates. Too premiumised in our view and not interesting .

Roche ( OTCQX:RHHBY ) cannot even rely on premiumisation from a rock-solid profile. They are dealing with biosimilar competition and have a problem with a spurt of diagnostic revenue that is now collapsing as COVID-19 becomes increasingly irrelevant in the west. Novartis ( NVS ) is more solid , and even trades cheaper than Roche despite a more solid outlook. Roche doesn't look great, Novartis looks better, and they together account for 25% of the portfolio, where healthcare exposures broadly are 33%. The rest of the healthcare exposures are likely solid, with Alcon ( ALC ) in ophthalmological products and others looking decent.

Financials is the other broad category headed by Zurich Insurance ( OTCQX:ZURVY ). Insurance and financial companies are solid in that a higher rate environment benefits them substantially. Insurance companies get higher yields on investment portfolios and banking exposures see growing net interest income. Insurance is the bigger presence within the financial exposure here, and that is just fine. Insurance companies have attractive economics and cash flow generation in a period where cash is becoming finally a little more scarce.

Conclusions

The ETF contains 47 stocks. It's small. And as is typical of small ETFs it doesn't run very cheaply. A 0.5% expense ratio is not great for the passive investor. Moreover, many of these stocks feature highly on other European value-weighted ETFs, even the iShares Core MSCI Europe ETF ( IEUR ) has all these stocks, admittedly in smaller quantities. In this case, it's for the best as the EWL elements aren't such jaw-droppers. This is not a riskless portfolio, yet the implied earnings yield from a 15x PE barely surpasses risk-free rates. The only benefit for the European investor is that some of these companies' cash flows are dollar-denominated, and has mitigated pressures in some of the fundamentals. Nothing compelling here.

For further details see: