What it means
A stock index tracks the combined performance of a basket of shares, giving a single number that rises and falls with the market. The EURO STOXX 50 selects leading companies from sectors such as banking, energy, consumer goods and technology across eurozone countries.
It is often described as the eurozone's equivalent of the blue-chip indices seen in other regions. The index is weighted by free-float market capitalisation, meaning the value of shares actually available for public trading rather than those held by founders or governments.
Larger companies therefore have a larger influence on the index. Rules also cap the weight of any single company so that a handful of giants cannot dominate completely.
The membership is reviewed regularly. Companies that grow can join and companies that shrink or fall out of favour can be removed, which keeps the index representative.
The index provider publishes the methodology, including how corporate events such as mergers or stock splits are handled. In practice, the index is used in three main ways.
Fund managers use it as a benchmark to judge their own returns, product providers build exchange-traded funds and other products to track it, and traders use futures and options on it to hedge or speculate. It is also quoted in the news as shorthand for how European shares performed on the day.
The index is quoted in euros and reflects the fortunes of companies that earn a large share of their income outside Europe. A rise in the index therefore does not always mean the eurozone economy is strengthening.
Investors outside the eurozone should also consider currency movements, because a rising index can still lose value if the euro falls against their home currency.
In practice
Real-world examples.
Example
A fund manager in Frankfurt runs a European large-company equity fund and compares her annual return of 8.5% with the index's 7.0%. She reports that she beat her benchmark by 1.5 percentage points. Her investors use this to judge her skill.
Example
An investor in Singapore buys an exchange-traded fund that tracks the index with $25,000. The fund holds shares in all 50 companies in roughly the same proportions. He gets broad exposure to eurozone blue-chip companies through one purchase.
Example
A company treasurer expects European markets to fall and sells index futures to protect the value of the firm's share portfolio. If the index falls, the gain on the futures offsets part of the loss. She sees this as insurance for a short period.
Formula
Calculation
Index level = Sum of (Share price x Number of shares x Free-float factor x Weighting cap factor) / Divisor
Worked example with a simplified two-company index: Company A has a price of $40, 100 million shares and a free-float factor of 0.80. Company B has a price of $20, 200 million shares and a free-float factor of 1.00. No caps apply and the divisor is 1,000,000,000.
Step 1: Company A free-float value = $40 x 100,000,000 x 0.80 = $3,200,000,000
Step 2: Company B free-float value = $20 x 200,000,000 x 1.00 = $4,000,000,000
Step 3: Total = $7,200,000,000
Step 4: Index level = $7,200,000,000 / 1,000,000,000 = 7.2
The figures are in dollars for simplicity, although the real index is calculated in euros.Case study
Seen in the real world.
Alderbrook Investments is an illustrative, fictional wealth manager that wanted to give clients simple exposure to European shares. It compared investing in individual companies with buying a low-cost fund that tracked a 50-company eurozone index.
The research team found that picking ten individual shares would leave clients exposed to the fortunes of just a few firms, while the index fund spread the risk across 50 companies and several industries. The fund also charged a lower annual fee than active alternatives.
Alderbrook offered the index fund as a core holding, with a small amount of money set aside for individual stock ideas. The illustrative lesson is that an index gives diversified exposure cheaply, though it cannot protect clients from a general market fall.
Watch out
Common mistakes.
- Believing it covers all of Europe, when it covers only companies from eurozone countries.
- Assuming it is purely a European economic gauge, when many constituents earn a large share of revenue worldwide.
- Ignoring currency risk, when a non-euro investor can lose money from exchange rate moves even if the index rises.
Questions
People also ask.
Is it the same as the STOXX 50?
No, the STOXX 50 draws from a wider set of European countries, including some outside the eurozone, while the EURO STOXX 50 is limited to eurozone countries.
Can I invest in it directly?
You cannot buy the index itself, but you can buy exchange-traded funds, index funds or futures that track it.
How often does the membership change?
The index is reviewed regularly under published rules, and companies are added or removed as their size and trading activity change.
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