For those who want to invest in a European stock index, the question arises as to whether they should choose the EuroStoxx 50 or the Stoxx 600. In this post we discuss the differences between the two most famous European stock market indices.
The EuroStoxx 50 is a stock market index calculated by the company STOXX that includes 50 of the largest companies in the Eurozone. The companies chosen are considered leaders in their respective sectors. As a result, all of them are blue chip stocks, that is, large and consolidated.
Companies are weighted according to their market capitalization adjusted for free float. That is, the market value of all their shares, excluding those held by people considered insiders, such as founders or governments.
Even though all listed companies in the euro zone are eligible to join the index, only 9 countries are represented: France, Germany, Spain, Holland, Italy, Ireland, Belgium, Finland and Luxembourg.
In fact, France and Germany represent around 35% each. Hence nearly 70% of the index is concentrated in French and German companies. As a result, the EuroStoxx 50 may not be totally representative of the Eurozone economy
Spain and Italy are the other two countries with a significant representation in the index.
For those looking for a European stock market index, the main advantage of the EuroStoxx 50 is that you know perfectly well what kind of companies you are going to invest in: large multinationals domiciled in the Eurozone, probably with a strong market position.
These types of companies are the ones that tend to withstand an economic crisis better, thanks to their size and stability. In addition, they are also the type of companies that can benefit from the loose monetary policy of the European Central Bank, which may allow them to issue debt at low interest rates.
When it comes to its disadvantages, the main issue is that the EuroStoxx 50 is not representative of the European, or even the Eurozone economies. This is because, as we have discussed earlier, only large companies from a handful of countries are included.
As a result, Germany and France are overrepresented. In fact, the correlation between the EuroStoxx 50 and the German DAX or French CAC 40 stock indices is very high.
In fact, 32 of the 50 companies in the EuroStoxx 50 are either German or French. And these are, coincidentally, the companies with the largest weights within the DAX and CAC indices.
On the other hand, many investors do not like to put their money in the biggest companies of the Eurozone. This is because they are usually the companies with the most bureaucracy and difficulty in adapting to changing market conditions.
Stoxx Europe 600
The European stock market index Stoxx Europe 600, also calculated by STOXX, includes 600 European companies from 17 different countries. Only developed economies are included, so most Eastern European countries are not part of this index.
The Stoxx 600 index also weights its companies based on their free float-adjusted market capitalization.
An important difference between the Stoxx 600 and the EuroStoxx 50 is that the Stoxx 600 is not limited to Eurozone or even European Union countries. In fact, the country with the largest weight is the United Kingdom. And in second or third position, depending on when we look, we will find Switzerland.
The other big difference is that, given it includes 600 companies, the Stoxx 600 is composed of many medium and small capitalization stocks.
As a result, the Stoxx 600 can be considered a European stock market index that truly represents the economy of Western Europe. In that sense, we could say the Stoxx 600 is the true European equivalent to the United States’ S&P 500 index.
There are several advantages to choosing the Stoxx 600 over the EuroStoxx 50 as the best European stock index benchmark.
First, the Stoxx 600 is truly representative of the European economy, including many more countries. That makes it a much more diversified investment.
It is worth highlighting the fact that about 40% of the capitalization of the index is located in countries that are not members of the European Union: United Kingdom, Switzerland and Norway.
And if we consider that Sweden and Denmark do not use the euro as their currency, about 45% of the capitalization of the index is in currencies other than the euro: Pound Sterling, Swiss Franc, Norwegian Krone, Swedish Krona and Danish Krone.
Second, because the number of stocks that make up the index is much higher, the Stoxx 600 allows us to invest in smaller corporations. These tend to have larger returns over the long term because they have greater growth potential.
The main disadvantage of investing in the Stoxx 600 is that, despite being a European stock index, it exposes us to a lot of currency risk. This is because almost half of the index’s stocks trade in currencies other than the euro.
While currency risk is not usually problematic in the long term, it can be in the short and medium terms. Consequently, even though we invest in European stocks, we will have a considerable amount of currency risk.
That is especially relevant when it comes to our exposure to Sterling and Swiss Franc-denominated stocks. An event like Brexit or a unilateral devaluation of the Swiss Franc by its central bank could affect us negatively.
However, as with all things risk-related, currency risk can also be a source of profit. The important thing is to be aware of it, have patience and invest for the long term.
If you want to learn more about currency risk, check out the following link:
I hope you now have a good idea of how both the EuroStoxx 50 and Stoxx 600 indices work. Although it is easy to get confused, they represent very different parts of the stock market.
If we want to invest in Eurozone stocks, with an emphasis on its largest companies, we will opt for an ETF or index fund that tracks the EuroStoxx 50.
On the other hand, if we want to invest in a European stock index that truly represents the state of the continent’s economy, we will opt for the Stoxx 600. It is a much more diversified index.
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Finally, I leave you the link to the official STOXX website for both indices analyzed in this article, so you can take a look at the complete list of companies included:
EuroStoxx 50 and Stoxx Europe 600