What it means
An index is a single number that stands in for a whole group of shares. The AEX takes a set of the biggest Dutch listed companies, weights each one by its market value, and reduces the lot to one figure that can be compared with yesterday, with last year or with another country's index.
The constituent list is reviewed on a published schedule, with companies joining or leaving according to how large and how actively traded their shares are. That review process is why the index is treated as a fair picture of the market rather than a fixed list of favourites.
Weighting by market value means the largest members move the index most. The AEX holds a relatively small number of constituents and the Dutch market contains several very large multinationals, so the index can be driven by a handful of names, a feature known as concentration risk.
For a business audience the index matters in three practical ways. It is the benchmark a Dutch pension fund or fund manager is measured against, it is the reference point for tracker products and derivatives, and it is the sentiment gauge that boards and journalists quote when they discuss market conditions.
Treat index moves as information about the market, not about your own company. A business can have an excellent quarter while the index falls, because the index reflects the aggregate of its members, currency effects on their overseas earnings and the mood of investors on the day.
The AEX also exists in capped and total return versions alongside the familiar price index. The capped version limits how much weight any single company may carry, and total return versions add dividends back in, which is why two quotes for the same index over the same period can differ noticeably.
In practice
Real-world examples.
Example
A Dutch pension fund measures its equity manager against the AEX and finds the portfolio returned 9.5% against an index return of 8.0%. The 1.5 percentage points of added value are what the trustees discuss, not the absolute return.
Example
A manufacturer listed in Amsterdam grows large and liquid enough to be added to the index at the next scheduled review. Tracker funds that follow the index must buy the shares, which creates a burst of demand that has nothing to do with the company's trading performance.
Example
A treasurer holding a large block of Dutch shares ahead of a planned disposal buys index put options as protection. If the market falls before the sale, the options gain value and cushion the loss, at the cost of the premium paid for them.
Formula
Calculation
Index level = Total free float adjusted market value of constituents / Divisor
Take a simplified three company index to show the mechanics. Company A has 100,000,000 shares at EUR 20, giving a market value of EUR 2,000,000,000. Company B has 50,000,000 shares at EUR 40, giving EUR 2,000,000,000. Company C has 200,000,000 shares at EUR 5, giving EUR 1,000,000,000. The total is EUR 5,000,000,000. At the base date the total was EUR 4,000,000,000 and the index was set at 100, so the divisor is EUR 4,000,000,000 / 100 = EUR 40,000,000. Today's index level is therefore EUR 5,000,000,000 / EUR 40,000,000 = 125, which says the market is 25% above its base date value.Case study
Seen in the real world.
This is an illustrative, fictional example. Veldhuis Index Partners, an invented asset manager, told clients it ran a low cost fund that followed the AEX closely. Over one year the fund returned 7.6% while the index was quoted as returning 9.1%, and clients wanted to know where the missing 1.5 percentage points had gone.
The explanation had two parts. The index quote clients had seen was a total return version including dividends, while the fund was being compared with a price only figure, which accounted for most of the gap. The remainder came from fund costs of 0.25% and the trading friction of rebalancing after the scheduled index review.
In this illustrative case nothing improper had happened, but the manager had been careless about which version of the index it quoted. The fix was to report against the correct total return benchmark every quarter and to show costs and tracking difference as separate lines.
Watch out
Common mistakes.
- Reading the AEX as a measure of the Dutch economy, when its members earn a large share of their revenue outside the Netherlands.
- Comparing a price index level with a total return figure and concluding that performance was worse than it really was.
- Assuming an index of this size is broadly diversified, when a few very large constituents drive most of its movement.
Questions
People also ask.
How many companies are in the AEX?
It is a blue chip index of roughly 25 of the largest and most actively traded Dutch listings, with exact membership reset at scheduled reviews.
Can you invest in the index itself?
Not directly, but you can buy a tracker fund, an exchange traded fund or a derivative that follows it, each with its own costs and tracking difference.
Why does the index move when no company has reported news?
Because prices reflect currency moves, interest rate expectations, sector sentiment and flows into and out of funds, none of which require a company announcement.
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