Home Bias: How Much Swissness Can Your Investment Portfolio Take?

Many investors tend to gravitate towards their home market when choosing stocks to invest in – a phenomenon known as home bias. In this guide, moneyland.ch answers the most important questions about this topic.

What is home bias?

The term home bias is used to describe the tendency among investors to overweigh their home country, or even limit themselves entirely to local stocks. In the case of investors in Switzerland, a home bias would result in Swiss stocks making up a bigger portion of your portfolio than could be justified by their market capitalization.

What are the reasons for home bias?

Some of the reasons for home bias are emotional. Swiss investors feel more of a connection to Swiss companies than to foreign ones. But the reasons for home bias in investing may also be rational:

• More knowledge: Emotional attachments are not the only reason for home bias. As a resident of Switzerland, you are likely more knowledgeable about Swiss companies, as well as their products and business models, than foreign companies. A good understanding of Swiss companies could be an argument for home bias – in keeping with the adage to only invest in things you understand.
• Lower transaction costs: Many Swiss stockbrokers charge lower brokerage fees for trades in Swiss stocks than for foreign stocks (see Table 1). Trading costs can have a substantial impact on your returns. Tip: Take time to compare brokerage fees using the interactive online trading comparison on moneyland.ch.
• Tax advantages: The Swiss withholding tax for shareholder dividends from Swiss stocks is returned to you in full. But with foreign stocks, the money withheld by foreign governments as withholding tax can often only be reclaimed in part, or not at all. If you use a Swiss stockbroker, then Swiss stocks have an additional advantage because the Swiss stamp duties you pay are lower than those levied for trades in foreign stocks.  
• Voting rights: Registering as a shareholder in the company’s shareholder register in order to claim your voting rights is often easier for Swiss stocks than for foreign stocks.
• No currency exchange costs: When you invest Swiss francs into franc-denominated stocks, you do not incur any currency exchange costs.
• Less political risk: Investments in foreign stocks may carry more political risk than investments in Swiss stocks, depending on the country. Legal security may also be poorer.

What are the disadvantages?

The biggest disadvantage of home bias is that it results in poor diversification. By overweighing Swiss stocks in your portfolio, or even invest exclusively in Swiss securities, you are figuratively putting all of your eggs in one basket. Always bear in mind that you can never predict future returns in advance – even if you know the company well.

A look at the makeup of the best-known Swiss stock indexes reveals just how few baskets your eggs would go into. As per November 2024, nearly 50 percent of the Swiss Market Index (SMI) is made up of just three companies: Nestlé, Novartis, and Roche. Even in the numerically more diversified Swiss Performance Index (SPI), those three stocks make up around 40 percent of the index.

If your investment portfolio is comprised primarily of exchange-traded funds (ETFs) that replicate the SMI or the SPI, then a large portion of your assets are invested in just three companies. However, it is necessary to note that many Swiss companies are globally active and form part of international value chains.  

The Japanese stock market offers interesting insights into the risks of home bias. Japan’s main stock index, the Nikkei 225, currently sits close to its 1989 level. The index fell sharply in the early 1990s, and has taken more than 30 years to recover. That example shows you just how important it is to spread your investment across more than one country.

How big should my Swiss component be?

Global stock indexes provide a good reference point for determining how much of your portfolio should be comprised of Swiss stocks. A global index tracks stocks from many different countries around the world. It may include only stocks from developed countries (FTSE Developed, MSCI World), or extend to emerging markets as well (FTSE All-World, MSCI ACWI). The market capitalization of stocks is the main factor for determining their weightings in global indexes.

In all of the global indexes mentioned above, Swiss stocks make up between 2 and 3 percent of the total index (as per November 2024). Of course, the weight that many private and institutional investors place on Swiss stocks is often much higher than 2 to 3 percent.

Table 1: Weightings of Swiss stocks in global stock indexes

¹ Source: UBS ETF (IE) MSCI World UCITS ETF (USD) A-dis
² Source: SPDR MSCI ACWI UCITS ETF
Source: Index publishers. Date: November 26, 2024.

Because of the rational reasons for a home bias mentioned earlier in this guide, it can make sense to use a Swiss component that is somewhat larger than those of global indexes. Your personal preferences and your overall investor profile also play a role.

You could, for example, incorporate a larger Swiss component into your investment strategy. This can be done using a core-satellite portfolio, for example, combining a globally diversified core with a satellite that is focused on Switzerland. You can choose the size of the satellite in relation to your whole portfolio. For example, the Swiss satellite could make up 20 percent of your portfolio – much more than the 2 to 3 percent weighting in global indexes.

How good do Swiss stock indexes perform?

A look at historical performance shows that having an excessive home bias would have been very costly in the recent past. The performance of the Swiss stocks included in the SMI has been much poorer than that of the MSCI World global stock index – both over the past five years, and over the past 10 years (see Table 2). US stocks, in particular, have clearly outperformed the Swiss stock market.

Table 2: Historical performance of ETFs that replicate different stock indexes, in Swiss francs

Source: Justetf.com. Cumulative performance in CHF, accounting for dividends, without accounting for custody and brokerage fees charged by stockbrokers. Dates used for performance calculations: November 25, 2014; November 25, 2019; November 25, 2024. Sorted by 5-year performance.

Important: Past performance should only be seen as a reference point. Historical performance is not an indicator of future performance. To minimize risk, it is advisable to spread your investments across many different countries and industry sectors.

Note: The information in this article is provided for educational purposes only, and should not be seen as investment advice. The publisher does not accept any liability in connection with this article.

More on this topic:
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How to invest money in Switzerland
Swiss stock indexes compared
How in invest in European stocks
How to invest in US stocks