What it means
An index is a basket of shares that is turned into a single number so that you can see at a glance whether a market is rising or falling. The STOXX 50 picks leading companies from a wide group of European countries, which makes it broader in geography than an index limited to the eurozone.
Typical members include large banks, energy firms, drug makers and consumer brands. Like most modern benchmarks, it is weighted by free-float market capitalisation.
This means each company counts in proportion to the value of the shares available to ordinary investors, so bigger businesses move the index more than smaller ones. The index provider sets rules for adding and removing companies, handling mergers and adjusting for share splits.
The index is quoted in euros and is used in the same ways as other large benchmarks. Fund managers measure their performance against it, product providers build tracker funds around it, and traders use related futures and options.
Journalists quote it as shorthand for the mood of European markets. A key difference from the eurozone-only index is currency and country mix.
Because it includes companies priced in pounds and Swiss francs, a change in exchange rates can affect how the index behaves when converted into euros. It also gives more weight to sectors that are strong outside the eurozone.
Investors should remember that index membership is concentrated in a small number of very large companies, and these firms earn money all over the world. A fall in the index may therefore reflect global events rather than anything happening in Europe.
It is a useful benchmark but not a complete picture of the European economy.
In practice
Real-world examples.
Example
A UK pension fund wants a benchmark for its European equity holdings that includes British and Swiss companies. It chooses the STOXX 50 because it is not limited to the eurozone. The fund's trustees compare yearly returns with the index to judge the manager.
Example
A private investor in Dubai buys an exchange-traded fund that tracks the index with $10,000. She receives exposure to 50 large European companies in one transaction. She understands that she also carries currency risk against her home currency.
Example
A financial journalist writes that European shares fell 1.2% on the day after a global bank warned about profits. The article cites the STOXX 50 and the eurozone index side by side. The difference between the two is traced to the strong weight of banks in one index.
Formula
Calculation
Weight of a company = Free-float market value of the company / Total free-float market value of all companies in the index
Worked example with a simplified three-company index: Company A has a free-float market value of $60 billion, Company B has $30 billion and Company C has $10 billion.
Step 1: Total free-float value = $60 billion + $30 billion + $10 billion = $100 billion
Step 2: Weight of A = $60 billion / $100 billion = 60%
Step 3: Weight of B = $30 billion / $100 billion = 30%, and weight of C = 10%
If Company A's shares rise by 5% and the others are unchanged, the index rises by 60% x 5% = 3%.Case study
Seen in the real world.
Fenwick Asset Partners is an illustrative, fictional investment firm that offered clients a European large-company fund. Its chief investment officer needed to choose a benchmark that matched the fund's holdings, which included companies from both inside and outside the eurozone.
An analyst showed that using a eurozone-only index would make the fund look better or worse purely because of its British and Swiss holdings, not because of the manager's decisions. The 50-company European index fit the fund's remit more fairly.
The firm adopted the broader index as its benchmark and explained the choice in its client reports. The illustrative lesson is that a benchmark should match the investment universe, otherwise performance comparisons can mislead.
Watch out
Common mistakes.
- Assuming it contains only eurozone companies, when it includes major firms from countries outside the euro area.
- Treating it as a measure of the European economy, when members earn a large share of their revenue worldwide.
- Picking a benchmark that does not match the portfolio, when this makes performance comparisons unfair.
Questions
People also ask.
How many companies are in the index?
It contains 50 companies, chosen from among the largest in Europe, and the list is reviewed regularly.
How is it different from the EURO STOXX 50?
The EURO STOXX 50 only includes eurozone companies, while the STOXX 50 draws from a wider range of European countries.
Is the Dow Jones name still used?
The index was historically branded with the Dow Jones name, and it is now generally known under the STOXX name.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related