How to Invest in the Italian Stock Market

Scenery, cuisine, art, and culture: There are many aspects of Italy that are held in high esteem. For some investors, Italy is also interesting as an investment opportunity. The most important Italian stocks are tracked by the FTSE MIB index.

What is the FTSE MIB index?

The Financial Times Stock Exchange Milano Indice di Borsa, or FTSE MIB for short, is considered the benchmark index for the Italian economy. It tracks the country’s 40 biggest companies – based on market capitalization. The stocks of these companies are traded on the Borsa Italiana in Milan. In order for a company to be included in the index, at least 30 percent of its shares must be available to the general public (free float).

Table 1: The ten companies with the heaviest weighting in the FTSE MIB

Source: FTSE Russell. Date: From November 30, 2023, recorded on December 11, 2023.

Like the Swiss Market Index (SMI) and the Nasdaq 100, the FTSE MIB is a price index that does not account for dividends. There is a separate performance index called the FTSE MIB Total Return Index. A performance index accounts for shareholder dividends in addition to stock prices.

Does the FTSE MIB accurately represent the Italian stock market?

The FTSE MIB, with its 40 stocks, is numerically more diversified than Switzerland’s SMI (20 stocks), but less diversified than the Japanese Nikkei 225 index (225 stocks) and the American Nasdaq 100 index. As the benchmark Italian index, the FTSE MIB represents around 80 percent of the country’s stock market, in terms of market capitalization.

The index is well diversified in terms of the different industry sectors it represents. However, the financial sector is relatively heavily weighted, making up 30 percent of the index.

If you are looking for an index that represents the broader Italian stock market, then the FTSE Italia All Share is a better match. It encompasses all of the stocks included in the FTSE MIB, the FTSE Italia Mid Cap (companies with mid-range market capitalization), and the FTSE Italia Small Cap (companies with low-range market capitalization). So the FTSE Italia All Share includes large, mid-sized, and small Italian companies listed on the stock exchange.

How can I invest in the FTSE MIB?

There are different ways to invest in the FTSE MIB. These are some of the options available to private investors in Switzerland:

• Buy shares in the companies that make up the FTSE MIB.
• Buy shares in a FTSE MIB exchange-traded fund (ETF).
• Buy shares in actively managed mutual funds.
• Use a FTSE MIB tracker certificate
• Use a fund savings plan based on a FTSE MIB mutual fund or ETF.
• Use a low-cost online asset management service (robo advisor) that invests in FTSE MIB stocks.

Which ETFs can I use to invest in the FTSE MIB?

Passively managed ETFs are a relatively simple and affordable way to invest in all of the companies tracked by the FTSE MIB index. ETFs make it possible to invest in the whole index even with small amounts of capital. Like stocks, ETFs are traded on stock exchanges, and you can buy and sell shares in ETFs at any time throughout trading days.

In order to buy shares in an ETF, you must first have a stock brokerage account. Many Swiss banks offer these accounts, but banks that specialize in online trading are typically much cheaper. The online trading comparison on moneyland.ch makes it easy to find the right brokerage account for your needs.

You can also invest in ETFs using one of the Swiss Neobanks Yuh or Neon. However, these neobanks only offer a limited selection of ETFs, so it is possible that you may not find the ETF you are looking for.

Table 2: ETFs that track the FTSE MIB, sorted by their total expense ratios (TERs)

Date: December 13, 2023.

The ETFs listed in Table 2 all use physical replication, meaning they do not use swaps to synthetically replicate the index. These funds replicate the index by actually buying and holding shares in the underlying companies. Funds that use physical replication are considered more secure than funds that use synthetic replication.

Which costs should I pay attention to when investing with ETFs?

The expenses generated by using ETFs to invest are relatively low, especially when compared to actively managed mutual funds. The ongoing fees charged by the ETF itself are shown as the total expense ratio (TER). On top of that, you also pay the brokerage fees charged by your bank when you buy and sell ETF shares. Additionally, your bank may charge ongoing custody fees for managing the shares in your account. You should also pay attention to Swiss stamp duties. Brokerage and custody fees vary between banks, while Swiss stamp duties are always the same regardless of which Swiss bank you use.

What are the advantages of investing in the FTSE MIB?

Italy is the world’s tenth-largest economy and hosts many world-famous brands. The FTSE MIB provides a fairly broad representation of the country’s stock market, accounting for around 80 percent of the total market capitalization. The index provides a way to geographically diversify your portfolio by including Italy in your stock investments.

Investments in the stock market can potentially bring you high returns. A direct comparison with the SMI shows that between December 2018 and December 2023, the FTSE MIB performed significantly better than the Swiss benchmark index.

Table 3: Performance of the FTSE MIB compared to the SMI

Index performance figures are based on the closing prices on December 7, 2018, and December 7, 2023. The EUR/CHF exchange rates are based on the closing prices on the same dates. Sources: Investing.com (index rates), Finanzen.ch (currency exchange rates).

What are the disadvantages and risks?

Investing in stocks always carries a risk of loss. That is also true for investing in the FTSE MIB. Be aware that your investments can lose value both over short terms, and in the long term. The risk is higher when you invest in just a few individual stocks. Funds like ETFs reduce the risk by spreading your money across many different stocks, but do not rule out the risk of losing money.

The heavy weighting of the financial sector in the FTSE MIB is also a possible risk. Although the index represents many different industry sectors, the two banks Unicredit and Intesa Sanpaolo alone make up around 20 percent of the index. In total, 30 percent of the index is comprised of stocks in the financial sector. So the FTSE MIB’s performance is heavily dependent on how the included bank stocks develop.

Additionally, there is also a currency exchange risk. The FTSE MIB is denominated in euros. If the euro loses value against the Swiss franc, the real return you earn in Swiss francs will also be smaller.

Conclusion

The FTSE MIB can be a good vehicle for diversifying your stock portfolio. ETFs, in particular, are a cheap and efficient solution for investing in the whole index even with small amounts of capital. However, basing your entire investment strategy on the Italian benchmark index alone is not a smart financial move. The index bears a number of risks, such as its over-exposure to the banking sector and the currency exchange risk. The rule of thumb: A well-diversified investment portfolio should cover different asset classes, industry sectors, and geographic regions.

More on this topic:
How to invest in the SMI
How to invest in the SPI
How to invest in the DAX
How to invest in the Nikkei
How to invest in Nasdaq
How to invest money in Switzerland