Swiss Market Index (SMI)

The Swiss Market Index (SMI) is Switzerland's premier blue-chip stock market index. Think of it as the Swiss equivalent of the American S&P 500 or the German DAX. The SMI comprises the 20 largest and most liquid stocks listed on the SIX Swiss Exchange, making it a snapshot of the health and performance of Switzerland’s most significant public companies. It is a free-float market capitalization-weighted index, meaning the influence of each company is based on the total value of its shares that are readily available for public trading. Because it's home to global giants in pharmaceuticals, banking, and consumer goods, the SMI is not just a barometer for the Swiss economy but also a reflection of global business trends in these key sectors. For investors, it offers a concentrated portfolio of some of the world's most stable and high-quality corporations.

The SMI's composition is straightforward but very exclusive. To be included, a company must rank among the top in terms of both liquidity (how easily its shares are traded) and its free-float market capitalization.

• The “Big 20”: The index includes the 20 largest and most liquid stocks, which are reviewed annually. This ensures the index always represents the titans of the Swiss market.
• Free-Float Market Cap Weighting: The weight of each company in the index is determined by its free-float market capitalization. This is calculated by multiplying the share price by the number of shares available to the public. It excludes shares held by insiders, governments, or other corporations, giving a more realistic picture of the company's public market value.
• The 18% Cap: To prevent a single corporate giant from completely dominating the index, a capping rule is applied. At each quarterly review, no single company's weight can exceed 18%. This rule helps maintain a semblance of balance, though as we'll see, the index can still be very top-heavy.

The SMI is famous for its heavy concentration in a few defensive and economically powerful sectors. The three dominant sectors are:

• Healthcare: Home to pharmaceutical behemoths like Novartis and Roche.
• Consumer Staples: Led by the global food and beverage giant, Nestlé.
• Financials: Featuring major banks and insurance companies like UBS, Zurich Insurance Group, and Swiss Re.

These three sectors typically account for a staggering 80-90% of the entire index's value.

For value investors, who seek quality companies at fair prices, the SMI is a fascinating case study in concentration and quality.

Understanding the SMI means appreciating its dual nature: it's a basket of world-class champions that also carries significant concentration risk.

• Unmatched Quality: The SMI is composed of global leaders, many of which boast formidable competitive advantages (or “moats”). These are often highly profitable, stable businesses with long track records of success—exactly the kind of firms that legends like Warren Buffett admire.
• Global Reach from a Stable Base: Investing in the SMI gives you exposure to companies that earn their revenue worldwide, not just in Switzerland. This global diversification is anchored in one of the world's most stable political and economic environments. The Swiss Franc (CHF) is also considered a safe-haven currency, which can add a layer of protection during global turmoil.

• Extreme Concentration Risk: This is the SMI's Achilles' heel. The top three companies—Nestlé, Novartis, and Roche—frequently make up more than 50% of the index's total weight. An investment in an SMI-tracking fund is, in reality, a massive bet on the performance of just these three giants. If one of them stumbles, the entire index feels the pain.
• Lack of Sector Diversification: With Healthcare, Consumer Staples, and Financials dominating, the index offers very little exposure to other important sectors like Technology, Energy, or Industrials. This means you miss out on growth in other parts of the economy.

You cannot buy an index directly. Instead, investors typically gain exposure to the SMI through financial products designed to mirror its performance.

• Exchange-Traded Funds (ETFs): The most popular and cost-effective method for an ordinary investor is to buy shares in an ETF that tracks the SMI. These funds are traded on stock exchanges just like regular stocks.
• Mutual Funds: Some actively managed or passive mutual funds also use the SMI as their benchmark.

When choosing a fund, always pay close attention to its expense ratio (the annual fee) and its tracking error (how well it actually replicates the SMI's performance). Given the SMI's concentration, a savvy value investor might also consider buying shares in a few of their favorite SMI companies directly, allowing for a more customized and diversified portfolio.