As a small open economy, Switzerland is affected by international cyclical developments and punches above its weight in the global equity markets, accounting for nearly 3% of total world value (or about 2.3% of Vanguard VT ETF as of Q2 2021). Nevertheless, what are the main Swiss stocks and which vehicles are best suited for investment in this market?
Low inflation and a strong currency have bolstered Switzerland’s reputation as a safe haven for foreign investments, and a significant part of the economy rely on successful small and medium-sized companies. . However, these exporting SMEs are diluted in the main indices by large multinationals and, due to the dominance of these global groups, other Swiss companies are poorly represented. These dominant positions are problematic in the sense that the index no longer so much reflects all of Switzerland’s largest capitalizations, but is strongly influenced by the three largest companies: Nestlé, Novartis and Roche together account for more than half of the index’s value.
The main indices are the MSCI Switzerland and the FTSE Switzerland, which track the largest stocks, or the SLI, which tracks the 30 largest and most liquid stocks in the Swiss equity market. The most widely used indices, however, are the SMI (1), which tracks the 20 largest Swiss capitalizations, and the SPI (2), which tracks the performance of the Swiss equity market as a whole.
- The Swiss Market Index (SMI) is a stock market index of the top 20 blue chip companies listed on the SIX Swiss Exchange. It covers about 85% of the Swiss market capitalization. The three largest market capitalizations, Nestlé (food ~ 18%), Novartis (medical ~ 18%) and Roche (medical ~ 17%), currently account for more than half of the index. Without a change in the SIX Swiss Exchange (capping the index at 18%), they would account for nearly three quarters of the total index. As an investment vehicle, the iShares SMI ETF (CH) has an acceptable P/E at around 20 currently, but the TER of 0.35％ makes it an expensive option.
- The Swiss Performance Index (SPI) is composed of almost all publicly traded Swiss companies and is the global benchmark for the Swiss equity market. Despite strong stock price increases, the SPI’s P/E ratio is 22 as of April 2021 and has not increased further as Swiss corporate earnings have remained strong in 2020. The iShares Core SPI ETF (CH) has the desired physical replication, but should be more diversified due to a larger number of constituents than the SMI. Unfortunately, Nestlé currently weighs 19%, while Novartis and Roche represent around 13%. Despite this concentration, the positive point is the Total Expense Ratio of 0.10%, which makes it the vehicle of choice.
For international investors, Switzerland is included in global indices and ETFs (between 2 and 4%): Additional exposure to Swiss equities and its reference currency, the Swiss franc, can currently be obtained through the iShares Core SPI® (CH) ETF. There are also less concentrated ETFs, but they are significantly more expensive, which is not recommended.
Most Swiss investors already diversify their portfolios internationally. They should not rely too much on their domestic market because of the concentration in Nestlé and pharmaceutical companies. Although these companies are apparently well managed, a major going concern issue would be a major blow to a concentrated portfolio, such as a Pillar 3 portfolio invested exclusively in Swiss equities. This increased need for international diversification for Swiss investors can be met by low-cost global portfolios such as VT or ishares MSCI World (beware, they have their own overweight issues: US stocks!).