The 23-year-old Swiss international agreed a long-term deal with the Gunners last week.
Xhaka, who will join up with his new teammates after Euro 2016, spent the last four years playing for Bundesliga outfit Borussia Monchengladbach.
Last summer, Arsenal's £10m capture of goalkeeper Petr Cech from Chelsea was their only piece of business in the transfer window, but they have acted early to nab Xhaka, which has pleased Smith.
"I think it's a good signing. He's one of those players that I don't think will shy away from the physical side of the game and along with Francis Coquelin, those two are defensive-minded midfielders. They might play together or just one of them, but he will hopefully bolster that midfield and give the defence good protection.
"I think it's a good signing and good that it's come early as well, which I think we all like to see."
Xhaka made 132 appearances for Monchengladbach during his four-year spell, scoring eight goals.
Alan Smith was speaking at online bookmaker Betway's Euro 2016 Kick-Off Show. Watch the video and read more in-depth Euro 2016 opinion at blog.betway.com.