I have never seen actual smoke come from switches. But I have seen them melt down pretty badly, even to the point on melting the connector. Doesn't surpise me that it would smoke. The fuse won't blow unless the wires get short circuited.
I open the switch up, and hose the inside out thouroughly with brake parts cleaner. Scrap any gunk off the contacts and use a points file if needed. then spray every thing down with electrical contact cleaner. A tiny dab of multi lube on the rocker tip, and all done.