Our Humble Solution to Unite Europe

Henry Kissinger famously said, “Who do I call if I want to speak to Europe?” In the world of investments, a similar question could be asked, “What index do I use if I want to invest in Europe?” The answer isn’t apparent, and this is why: the leading regional index in Europe, the EURO STOXX 50, doesn’t represent all of developed Europe.

This is a problem and an opportunity. It’s a problem because investors don’t realize the full network effects of relying on one index standard. Though the EURO STOXX 50 is the top index, investors use many indices to get exposure to this region. The result is a fragmented index landscape.

On the other hand, it’s an opportunity for an index provider to step forward to unite Europe by establishing a solution that is both representative of the region in its entirety and an efficient underlying for derivatives and other financial products.

Though establishing a new index standard may seem an impossible mission, we are regularly approached by investment banks and asset managers who are interested in a change. With this in mind, it’s worth considering from time to time what the ideal index landscape for Europe should be and whether the investment community can take steps to achieve it. Solutions already exist. We feel that S&P Dow Jones Indices has a strong candidate in the S&P Europe 350. The challenge is to elevate an index like this for the market to rally around.

A New Standard for Europe
The EURO STOXX 50 is the leading index for futures and options trading, as well as the leading index for ETF assets in the region. The main advantage of this index is its efficiency. The index has, of course, 50 constituents that are easily bought and sold and therefore represent a hedgeable underlying for financial products. The major downside to this index is that it only represents the Eurozone, and therefore excludes major markets such as the United Kingdom and Switzerland.

The S&P Europe 350, on the other hand, includes securities from every developed market but still contains a manageably low number of constituents. It covers 81% of Europe’s market capitalization using only 20% of the region’s tradable securities. The country weightings of the S&P Europe 350 are roughly in line with the broad universe, while the EURO STOXX 50 is weighted much differently. The table below that compares these indices with the S&P Europe Broad Market Index illustrates this.

Country S&P Europe 350 S&P Europe BMI EURO STOXX 50
Austria 0.2% 0.5%
Belgium 2.2% 2.3% 3.7%
Denmark 2.6% 2.7%  –
Finland 1.5% 1.8% 1.2%
France 15.4% 14.7% 37.0%
Germany 14.1% 13.6% 33.1%
Ireland 1.1% 1.2% 1.3%
Italy 3.4% 3.6% 4.5%
Luxembourg 0.4% 0.4%  –
Netherlands 4.9% 5.3% 9.5%
Norway 0.9% 1.4%
Portugal 0.2% 0.3%
Spain 4.7% 4.8% 9.8%
Sweden 4.6% 5.3%
Switzerland 14.4% 13.4%
United Kingdom 29.6% 28.8%
100% 100% 100%

Sources: S&P Dow Jones Indices, STOXX Ltd.

Though these three indices – the S&P Europe 350, S&P Europe BMI, and the EURO STOXX 50 – are highly correlated, the EURO STOXX 50 has underperformed, with higher levels of risk.

Data as of Oct 31, 2016 (Euros, TR) S&P Europe 350 S&P Europe BMI EURO STOXX 50
Annualized Returns
1 Year -6.33% -5.59% -7.95%
3 Year 4.90% 5.68% 2.62%
5 Year 10.31% 11.07% 8.28%
10 Year 2.98% 3.42% 0.41%
Annualized Risk
3 Year 12.96% 12.69% 14.92%
5 Year 11.85% 11.68% 14.62%
10 Year 15.35% 15.52% 18.28%
Risk Adjusted Return
3 Year 0.38 0.45 0.18
5 Year 0.87 0.95 0.57
10 Year 0.19 0.22 0.02

Sources: S&P Dow Jones Indices, STOXX Ltd.

A Change is Needed and Will Come
Europe needs an index that balances efficiency and breadth such that investors enjoy the benefits of both. We are speaking with major product providers and institutional investors about the S&P Europe 350 as a solution. A change from the current indices won’t happen soon, but it will eventually come, and when it does, we will wonder why we didn’t make the switch sooner.

The posts on this blog are opinions, not advice. Please read our disclaimers.

Leave a Comment

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>