Switzerland’s Most Important Stock-Market Barometer: What Is the SMI?

In order to gain an understanding of what the SMI is, how it works, and what purpose it serves, we must first take a look at the concept behind an index. An index describes a basket of companies operating in a certain market segment. It depicts the overall performance of a selection of securities in a single number. An index is not an investment product in itself, but only serves as an indicator for a market by enabling a comparison between the current and a past price level. The value of an index is expressed in points, not in an amount of money. An index can depict all kinds of markets, such as the world equity market, for example, the market on a single continent, in a single country, or in a certain sector, or a set of companies of a specific size.

Indices are important instruments in the world of finance. They aggregate the performance of different stocks in a single number, enabling comparisons to be made between the current state of the market and past times. They provide vital insights into the evolution of markets, investor sentiment, and economic trends. Indices are more than just barometers; they are also useful tools that help banks to perform research and advisory and risk management. Moreover, indices serve as underlying assets for financial products such as exchange-traded funds, index funds, structured products, and derivatives.

The SMI is the most important stock index in Switzerland. It is a blue-chip index. The term “blue chip” comes from casinos, where the blue chips are the most valuable ones on the table. In the world of finance, the term “blue chip” denotes especially large companies with a high market capitalization. The SMI contains the 20 largest and most liquid Swiss stocks from A as in ABB to Z as in Zurich Insurance Group. Those 20 stocks alone account for approximately 75% of the total capitalization of the Swiss equity market. This means that if one adds up the individual market caps of all of the companies listed in Switzerland (around 225 in all), the 20 stocks in the SMI make up around 75% of the total. The SMI is free-float-adjusted, which means that when it is calculated, only the freely tradable portion of company shares held in public float is taken into account. For example, if a single shareholder owns more than 5% of all shares in a given company, they are not considered in the index.

Since the year 2007, the SMI has always contained 20 companies, but that number previously fluctuated between 18 (in 1993) and 29 (in 2000). The companies in the SMI are the largest and most liquid ones in Switzerland. They are chosen on the basis of two criteria:

• Average Free-Float Market Capitalization over the Last 12 Months
  This refers to the total value of all shares that are freely tradable and are not in fixed ownership by long-term investors. Or put more simply, this refers to number of shares that can be purchased by the general public multiplied by the price per share.
  
  
• Order Book Turnover over the Last 12 Months
  Order book turnover measures how often shares of a given company trade. Every time a transaction involving shares of that company is conducted, that gets counted as turnover. High order book turnover thus means a lot of transactions, which in turn means that the company’s stock has high trading liquidity.

To summarize: The SMI contains the 20 Swiss companies that exhibit the highest free-float market caps and the highest order book turnover over the last 12 months. Both criteria are weighted identically. The cutoff date for the respective calculations is June 30 each year. Any adjustments to the constituent companies in the index are carried out in September of each year.

There are also exceptions, though, such as when an SMI company exits the stock exchange. The most recent example of this is Credit Suisse. An unscheduled adjustment was undertaken in this instance. Credit Suisse was replaced by the logistics group Kuehne+Nagel. UBS, which took over Credit Suisse, was accordingly assigned a heavier weight in the index.

In order to represent the market accurately, the stocks in the SMI are not weighted equally. This means that the bigger companies in the index have a heavier weight than the smaller ones do. Three companies in particular predominate in the SMI: Nestlé, Roche, and Novartis. These three fluctuate over time and together make up approximately 46% to 54% of the index’s total weight. So, if the share price of Nestlé, for example, rises sharply, that has a bigger impact on the value of the SMI than when the share price of a comparatively small company changes substantially.

The index weights are calculated based on free-float market caps, i.e. the product of the number of shares outstanding times a company’s free-float factor times its share price. To prevent the weight of an individual company from becoming too dominant, a cap to 18% is applied on a quarterly basis, and weights are additionally reduced ad hoc to 18% if two companies exceed a weight of 20% during a quarter.

SIX is the publisher of the SMI. SIX determines which companies are represented in the index as well as their respective weights and calculates the index in accordance with a predefined index methodology rule book. However, SIX does not decide what happens with the SMI on its own. SIX periodically conducts market consultations with clients to ensure that the methodology of the SMI meets the market’s needs, most recently at the end of 2023. An index commission is also involved as an advisory body in decisions on potential changes, such as to the calculation methodology, for example. Employees of SIX and representatives of users of indices such as banks sit on the commission.

The SMI is the best-known, but not the only index that SIX publishes. SIX supplies over 2,500 indices for Swiss and Spanish stock-market segments (including the IBEX 35 Index) as well as indices tracking real estate funds, bonds, and a variety of specific sectors. Two other major indices especially relevant to the Swiss market are the Swiss Performance Index, which captures all companies listed in Switzerland, and the Swiss Leader Index, which expands the selection of companies in the SMI to include an additional ten and thus contains the 30 largest and most liquid stocks in Switzerland.

The SMI was introduced in June 1988, with a base level of 1,500 points. The index reached its all-time high to date in January 2022 at a level of 12,997.15 points. After its launch, it didn’t take long until the price of the SMI was regularly reported in the media to depict the prevailing conditions on the Swiss stock market. The rapidly growing attention that the SMI garnered soon turned it into the flagship index for Switzerland, and it has remained that to this day.

Whoever wishes to invest in the Swiss economy is well served by the SMI. However, the SMI is not a financial instrument in itself. Instead, there are quite a number of index funds and ETFs that use the SMI as their underlying asset. This means that those funds exactly replicate the performance of the SMI.