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Invest sustainably in US small caps and global real estate

Credit Suisse Asset Management is launching two new ETFs today, the CSIF (IE) MSCI USA Small Cap ESG¹ Leaders Blue UCITS ETF and the CSIF (IE) FTSE EPRA Nareit Developed Green² Blue UCITS ETF.

June 29, 2020

Stefan Fröhlich

Head of Portfolio Management Index Solutions

The former focuses on US small caps and is particularly important for portfolio diversification, while the latter targets global real estate and offers an above-average dividend yield. The new ETFs continue the success story started by our ETFs launched in March.

Credit Suisse Asset Management again began offering its own ETFs on March 16, 2020. We now manage over USD 2 bn in ETFs, which are part of the Credit Suisse Index Funds (CSIF), a range of 97 index funds and ETFs with total assets of USD 104 bn.3 According to Morningstar, this makes Credit Suisse Asset Management the fourthlargest provider of index funds and ETFs in Europe. Like those already launched, the two new ETFs can also be traded on the Swiss, Italian, and German stock exchanges. Both ETFs focus on sustainability and supplement our steadily growing range of ESG index funds. Furthermore, the funds are geared toward innovative index concepts that were previously inaccessible as ETFs in Europe. Both ETFs also include the word “Blue” in their names, to indicate that they do not undertake securities lending.

Small caps, big potential

With the CSIF (IE) MSCI USA Small Cap ESG Leaders Blue UCITS ETF, Credit Suisse Asset Management is opening the door for investments in shares in US companies with a market capitalization of below USD 10 bn. In contrast to standard indices, small-cap indices provide better diversification. While the two largest stocks in the MSCI USA Index – Microsoft and Apple – each have a weighting of around 5%, the largest stock in the reference index of our new ETF accounts for less than 1%. The ten largest stocks together account for a weighting of just 7%.4

The MSCI USA Small Cap ESG Leaders Index consists of around 700 stocks. It therefore covers almost half of the entire US small-cap universe. US small caps account for around 14% of US market capitalization.5 Although small caps are considered more volatile, and therefore more risky than large and mid caps, the addition of small caps increases the diversification of each equity portfolio and prevents unintentional positioning against the market segment of second-liners. Historical data also show that, in the long run, small caps generate an additional return compared to standard stocks with a high market capitalization. This “small firm effect” can also be identified in the chart, although small stocks have suffered disproportionately from the slump in prices caused by the COVID-19 pandemic. Taking an anticyclical viewpoint, there is much to be gained from adding small caps to the present CSIF range of funds.

us-small-caps-ch-en.jpg

6 IMI = Investable Market Index (a combination of a standard index and small caps).
7 Annualized from June 2001 to March 2020, gross returns in USD.
Source: Credit Suisse

The MSCI USA Small Cap ESG Leaders Index was selected as the reference index. The portfolio has therefore been structured according to ESG criteria. Only companies that show above-average performance in their respective sectors in terms of environmental, social, and governance factors are included. In addition, Ireland was deliberately selected as the fund domicile, as Irish ETFs enjoy a tax advantage in respect of withholding tax on US equities – only 15% withholding tax is deducted for Irish ETFs, instead of 30%. The current dividend yield for the reference index is 1.8%. The better tax status of an Irish ETF therefore leads to an additional return of 27 basis points (bps) per year compared to investment funds domiciled in Luxembourg or Switzerland.

Three reasons for investing in small caps:

Exchange-traded real estate funds – a gREIT idea!

No, that’s not a typo; in fact, the heading refers to the abbreviation for our new ETF for exchange-traded real estate stocks, or real estate investment trusts (REITs). Credit Suisse Asset Management already manages over USD 6 bn in index portfolios for exchange-traded real estate investments. The newly launched CSIF (IE) FTSE EPRA Nareit Developed Green Blue UCITS ETF emulates the index of the same name, which is a subset of the well-known and established FTSE EPRA Nareit Developed Index. “Nareit” is the abbreviation for National Association of Real Estate Investment Trusts. The word “Green” in the name indicates a fund that takes sustainability criteria such as environment certificates and energy consumption of real estate into consideration. As regards real estate investments, there were no suitable instruments in the past that enabled investors to assess their climate risk and effectively integrate it into their investment strategies. In order to close this gap, the FTSE EPRA Nareit Green indices were developed, giving investors opportunities to invest in real estate companies that demonstrate sustainability excellence.

Source: Credit Suisse, April 30, 2020, in USD

Historical performance indications and financial market scenarios are not reliable indicators of future performance. It is not possible to invest in an index. The index returns shown do not represent the results of actual trading of investable assets/securities. Investors pursuing a strategy similar to an index may experience higher or lower returns and will bear the cost of fees and expenses that will reduce returns.

Three reasons for investing in real estate investment trusts:

The index invests in 295 exchange-traded real estate stocks. As with the MSCI ESG Leaders concept, this index is also largely country neutral compared to the FTSE EPRA Nareit Developed. Compared with the standard index, the “Green” version shows a 25% reduction in CO2 emissions per US dollar in income. The consideration of sustainability criteria is particularly effective with regard to real estate investments: based on United Nations estimates, around half of global electricity consumption and 28% of CO2 emissions are attributable to buildings (see chart). The risks in connection with a REIT investment vary and depend on the individual attributes and features of the particular REIT and the geographical location of the investments. It is recommended not only to consider the expected return, but also to factor in the concentration, quality, and rental term of the underlying properties.

Share of global energy-related CO₂ emissions by sector

Source: UN Environment Programme (2017), Towards a zero-emission, efficient, and resilient buildings and construction sector

Small caps and real estate ETFs in your portfolio

Both the CSIF (IE) MSCI USA Small Cap ESG Leaders Blue UCITS ETF and the CSIF (IE) FTSE EPRA Nareit Developed Green Blue UCITS ETF offer numerous advantages that make them suitable additions to every portfolio. Small caps provide additional diversification and benefit from the small firm effect in the long term. As a rule, they reap an above-average benefit from economic recovery phases. REITs, on the other hand, are an interesting hybrid product. As “real estate stocks” they combine the advantages of equity investments (flexible tradability on stock exchanges, liquidity, low transaction costs) with the attributes of real estate funds.

Historical performance indications and financial market scenarios are not reliable indicators of future performance. The product’s investment objectives, risks, charges and expenses, as well as more complete information about the product, are provided in the prospectus (or relevant offering document), which should be read carefully before investing.

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Sources

1 The abbreviation ESG stands for environmental (E), social (S), and governance (G). More information can be obtained at credit-suisse.com/am/esg.
2 The word “Green” in the name indicates a fund that takes sustainability criteria such as environment certificates and energy consumption of real estate into consideration.
3 Data as of 29.05.2020.
4 Source: MSCI, 30.04.2020. By way of comparison, the top ten in the MSCI USA Index have a weighting of 24.5%.
5 Source: MSCI, 30.04.2020, msci.com/documents/10199/e2289c24-2ced-43a5-bf38-5ae96a7bd98e. 



Source: Credit Suisse, unless otherwise specified
Unless noted otherwise, all illustrations in this document were produced by Credit Suisse Group AG and/or its affiliates with the greatest of care and to the best of its knowledge and belief.


This document was produced by Credit Suisse Group AG and/or its affiliates (hereafter “CS”) with the greatest of care and to the best of its knowledge and belief. However, CS provides no guarantee with regard to its content and completeness and does not accept any liability for losses which might arise from making use of this information. The opinions expressed in this document are those of CS at the time of writing and are subject to change at any time without notice. If nothing is indicated to the contrary, all figures are not audited. This document is provided on a confidential basis and for information purposes only and is for the exclusive use of the recipient. This document has not been reviewed or approved by any supervisory authority in Luxembourg or elsewhere. It does not constitute an offer or a recommendation to buy or sell financial instruments or banking services and does not release the recipient from exercising his/her own judgment. The recipient is in particular recommended to check that the information provided is in line with his/her own circumstances with regard to any legal, regulatory, tax or other consequences, if necessary with the help of a professional advisor. This document may not be reproduced either in part or in full without the written permission of CS. It is expressly not intended for persons who, due to their nationality or place of residence, are not permitted access to such information under local law. Neither this document nor any copy thereof may be sent, taken into or distributed in the United States or to any U.S. person*. Every investment involves risk, especially with regard to fluctuations in value and return. Investments in foreign currencies involve the additional risk that the foreign currency might lose value against the investor’s reference currency. Historical performance indications and financial market scenarios are not reliable indicators of current or future performance. Figures shown are intended to demonstrate performance history of the funds. Performance indications do not consider commissions levied at subscription/purchase and/or redemption/sale. No representation is made that the investment policy or strategy pursued by the investment fund will or is likely to be successful or achievable. Furthermore, no guarantee can be given that the performance of the benchmark will be reached or outperformed. The attention of investors is specifically drawn to the “Risk Factors” section in the sales prospectus and although high priority is given to risk control and monitoring, it cannot be ruled out that in exceptional cases a significant loss on individual investments may occur.

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