What are blue chips?

By definition, blue chips are nationally or internationally recognized, well-established and financially stable companies that are traded on the stock exchange. They generally have a high level of market capitalization, are listed on a major stock exchange and possess a strong record of reliable growth and dividend payments. In financial jargon, they’re usually called large caps, in contrast to mid and small caps, which are companies with low to medium market capitalization.

Find out more about small caps and mid caps in the article “Small and mid caps: invest money in small and medium-sized enterprises”.

Where does the term blue chip come from?

The term originally comes from poker, where the blue chips are generally the most valuable on the table. Its meaning was extended to the financial sector by a former employee of Dow Jones & Company who, while at work, observed that some equities were continually being traded above 200 US dollars each. These expensive equities were nicknamed blue chips, as based on the poker analogy, they were considered very valuable. However, this price classification no longer applies to blue chips today. Some are trading below 200 US dollars per share, while others change hands for well over 1,000 US dollars each.

Blue chip equities on the Swiss market

While there’s general consensus on and a definition of what blue chips are (see “What are blue chips?”), there’s no official list. However, the equities of companies listed on the major indexes are often defined as blue chips. Swiss companies generally recognized as blue chips are listed on the Swiss Market Index (SMI), Switzerland’s main share index. This includes the 20 biggest Swiss companies (e.g. Nestlé, Novartis, Roche, Swiss RE, etc.), measured by average market capitalization and annual turnover on the exchange (the total turnover of securities traded; e.g. of a particular company, within a certain period).

As at September 2023, the following Swiss companies were listed on the SMI and recognized as blue chips (in alphabetical order):

• ABB
• Alcon
• Geberit
• Givaudan
• Holcim
• Kühne + Nagel International
• Logitech
• Lonza
• Nestlé
• Novartis
• Partners Group
• Richemont
• Roche
• Sika
• Sonova
• Swiss Life
• Swiss Re
• Swisscom
• UBS
• Zurich Insurance

Pros and cons of blue chips

There are pros and cons to investing in blue chips. The main advantages and downsides are set out below:

Advantages

• Lower risk: as established industry heavyweights, blue chip companies generally have reliable cashflow (annual net profit/loss) and vast payment experience, which is why they’re generally considered lower risk than equities that aren’t blue chip. This means they’re unlikely to be hit by a sudden credit or liquidity crisis.
• Regular dividends: blue chip companies generally pay out dividends  The portion of a company's profit that goes to its shareholders. on a regular basis.
• Less volatility: blue chips are deemed stable companies in view of their proven business model, well-established business activities, reliable income streams and longstanding brands. As a result, blue chips often suffer lower losses than other equities in periods of downturn or recession. That’s why blue chips add stability to a custody account and generally perform well in terms of long-term price trends.

Disadvantages

• Lower returns: compared with smaller companies, blue chip shares generally yield more modest profits, as they have less room for strong and rapid growth. The basic principle of financial investment is high risk equals potentially high return – low risk generally means less yield.
• High purchase price: due to their lower risk, reliable yield potential and lower volatility, there’s usually strong demand for blue chips, making them more expensive than the equities of other companies.
• Under the spotlight: the size of blue chip companies often means they attract more media attention. Bad news generally leads to major headlines, which can weigh significantly on the equity price. This can result in these companies losing their place in the index if market capitalization falls below the required level.

Which are the best blue chips?

Due to various factors and the different evaluation criteria used, there’s no universally valid answer to the question of which blue chips are the best. For example, the key business figures on which these evaluations are based are constantly changing. The same applies to price fluctuations which, in turn, impact on yield potential. That’s why it’s important to evaluate these companies individually. Whether blue chip equities in general or a specific blue chip company would be a good addition to your portfolio depends heavily on your investor profile  An investor profile forms the basis for all investment during consultation and includes of an investor’s risk capacity and risk appetite. Your personal investment recommendation is drawn up on the basis of your investor profile and your investment horizon. and your current investments, with the keyword being diversification  The term diversification comes from economics. In the financial sector, it refers to spreading capital as widely as possible across different markets, sectors, currency areas and securities. The aim of diversification is to reduce risks..

For which investment strategies are blue chips an attractive option?

As blue chip companies are well-established industry heavyweights and usually pay out high dividends, conservative and income-oriented investment strategies often invest in them. However, such investment usually takes the form of exchange-traded funds  An exchange traded fund (ETF) is usually managed passively. This means it tracks the performance of a pre-defined index, such as the SMI. Like shares, ETFs can be traded on the stock exchange.. Direct investment in blue chip equities is generally advisable only for investors with lots of experience and substantial assets. Compared with other investment options, direct investment in equities is generally regarded as high risk. That’s why it’s worth consulting experts and defining your risk profile before investing.