What it means
An index is just a weighted average of share prices, rebased to a starting number so that movements are easy to read. The CAC 40 is calculated continuously during trading hours from the prices of its 40 constituents, which are selected from the most liquid shares on the Paris market.
A committee reviews the membership periodically and swaps companies in and out as their size and trading activity change. Weighting is based on free-float market capitalisation, meaning the value of shares actually available to trade rather than the whole company.
Stakes held by founders, governments or long-term strategic holders are excluded, so the index reflects investable value. Each constituent's weight is also capped, which stops one very large company dominating the whole index.
The index matters to finance teams in several practical ways. It is the reference point for French equity fund performance, the underlying for futures and options used to hedge European equity exposure, and a common comparison when a French company reports its own total shareholder return.
Many corporate incentive plans are measured against it. Because the largest French listed companies earn much of their revenue abroad, the CAC 40 is not a pure gauge of the French domestic economy.
Luxury goods, energy, pharmaceuticals and industrials carry heavy weights, so global demand and the euro exchange rate move the index as much as French conditions do. Reading it as a national economic indicator therefore overstates what it measures.
A further nuance is the difference between price and total return versions. The widely quoted CAC 40 is a price index, so it excludes dividends, while the total return version reinvests them and rises faster over time.
Comparing a dividend-reinvesting fund against the price index flatters the fund, which is a common error in performance reporting.
In practice
Real-world examples.
Example
A pension fund trustee compares a French equity manager returning 9.2% against the CAC 40 total return index at 8.1%. The 1.1 percentage point difference is the manager's value added, and the trustee notes that comparing against the price index instead would have exaggerated it.
Example
A European industrial group holds a large portfolio of listed French shares ahead of an uncertain election. The treasurer sells CAC 40 futures to offset part of the exposure, so a market fall is partly recovered on the hedge rather than taken in full.
Example
A French listed company sets a long-term executive share plan that pays out only if total shareholder return beats the CAC 40 over three years. Management therefore has to outperform the market rather than simply benefit from a rising one.
Formula
Calculation
Formula: a constituent's index weight = its free-float market capitalisation / the combined free-float market capitalisation of all 40 constituents, subject to the cap. Worked example: suppose the 40 constituents have a combined free float of EUR 1,200 billion and one company's free float is EUR 60 billion. Weight = 60 / 1,200 = 0.05, which is 5%. If that share price rises 10% while every other constituent is unchanged, the index rises 5% x 10% = 0.5%. With the index starting at 7,500 points, that is 7,500 x 0.005 = 37.5 points, taking it to 7,537.5.Case study
Seen in the real world.
This is an illustrative, fictional example. Lumiere Capital, an invented boutique asset manager, marketed a French equity fund that had returned 46% over five years against a CAC 40 price index gain of 38%.
A prospective institutional investor asked for the comparison against the total return index, which had gained 51% once dividends were reinvested. The fund had in fact underperformed, and the apparent 8 percentage point lead was an artefact of comparing a dividend-collecting portfolio with an index that ignores dividends.
In this fictional case the manager corrected its reporting to show both measures side by side. The episode is a reminder that choosing the wrong version of an index can change a conclusion completely.
Watch out
Common mistakes.
- Treating the CAC 40 as a measure of the French domestic economy, when its constituents earn a large share of their revenue outside France.
- Comparing a fund that reinvests dividends with the price version of the index, which overstates the fund's performance.
- Assuming index membership is fixed, when a review committee adds and removes companies as liquidity and size change.
Questions
People also ask.
How is the CAC 40 weighted?
By free-float market capitalisation, which counts only shares available to trade, with an individual weight cap to limit concentration.
Can I invest in the index directly?
Not in the index itself, but you can buy index funds, exchange traded funds or futures that track it.
How does it compare with other European indices?
It plays the same role in Paris that the FTSE 100 plays in London and the DAX plays in Frankfurt, though sector mixes differ considerably.
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