Many retail investors feel they're on solid ground when they put their money into a broad index fund tracking the S&P 500, the DAX, or the Swiss SMI. The idea is maximum diversification with minimum effort. But a closer look at today's markets reveals that this sense of security can be misleading.
The Dominance of the Heavyweights
Most well-known indices are weighted by market capitalization. The more highly a company is valued on the stock market, the greater its weight in the index.
In Switzerland, this concentration risk is particularly visible. The SMI has long been dominated by a handful of heavyweights. Currently, the top three stocks, Novartis, Roche and Nestlé, make up more than 50% of the entire index. If just three companies catch a cold, the whole index catches the flu. We saw exactly this with Roche recently: after disappointing clinical trial results, the stock fell sharply and dragged the entire index down with it, regardless of how well the remaining 17 companies were doing.
This isn't purely a Swiss problem, either. Germany's DAX 40 was expanded from 30 to 40 companies in 2021 to improve diversification, yet the five largest corporations still account for over 42% of the total weighting. In the US, the top 10 companies in the S&P 500 now make up around 40% of the index.
Popularity Isn't the Same as Quality
The fundamental flaw with capitalization-weighted indices is that they weigh stocks by current popularity, not operational performance or underlying value. When you buy a DAX or SMI ETF, you're inevitably putting the bulk of your money into the stocks that are already the most expensive.
At Obermatt, we take a different approach, evaluating companies on objective financial facts and grouping them by what different investors actually need, because not everyone is after the same thing:
- Value Rank. The core tool for value-oriented investors looking for real bargains, not willing to overpay for future promises. It focuses on price relative to performance within an industry peer group.
- Growth Rank. Aimed at investors with a longer horizon, this measures real growth in sales and profit. It takes patience to ride out short-term swings, but the payoff is exposure to genuine, operational business expansion.
- Safety Rank. For investors whose priority is capital preservation. It looks at balance sheet strength, leverage, and refinancing risk, essential for anyone who needs to avoid defaults or dilutive capital raises.
- Sentiment Rank. For those who would rather follow the market's pulse than examine financial statements. It tracks analyst views, professional investor behavior, and market pulse.
True Diversification in Practice
To protect against the dominance of index heavyweights, a conscious shift away from a purely market-cap-driven mindset is essential. Investors who select their own stocks can use the objective Obermatt Ranks to tailor their portfolio to their individual investment goals. This does require the discipline to avoid the concentration risks that can easily creep into a personal portfolio unnoticed if certain sectors are overweighted or if there is too much reliance on familiar large corporations. For investors who prefer to rely on an index, the Obermatt Swiss Pearls Index (OMSP1) offers an alternative with more equal weighting and diversification than the standard SMI and SPI.