What is a market index and how can you invest in it?
Fabrice Rahmouni, Head of Indices at Euronext, explains what an index is, how indices are used and how to invest in them.
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What is an index?
An index can be described as an indicator that tracks the performance of a basket of securities, derivatives, or other financial instruments. An index aims to represent and measure the performance of a specific market, an asset class, sector, or even an investment strategy. For instance, the CAC 40® index is the barometer of the large capitalisation segment of the French market.
How are indices used?
Indices serve as market indicators, and are often described as a barometer that reflects the economic health of the financial markets. Indices can be used as benchmarks to compare the performance of, for instance, a fund. They can also be used as the base (the underlying) for financial products like Exchange Traded Funds (ETFs) or Warrants and Certificates. They can also be used as tools to calculate financial metrics for research and analysis.
So, whether you are looking to track a particular theme, evaluate the performance of your portfolio, or invest directly in a product based on a specific index, indices are key financial tools.
How to invest in an index?
An index is not a financial product that you can directly invest in. It cannot be bought or sold, like a stock. However, as mentioned above, there are solutions that allow you to replicate the performance of indices, such as exchange-traded funds (known as ETFs), warrants and certificates, or derivatives products like futures and options.
Lets take ETFs as an example
An ETF is basically a fund that you can buy or sell like a stock on the exchange. ETFs can replicate and track the performance of an index, making them a very popular product among the investor community. ETFs offer exposure to a wide number of securities and markets, allowing you to diversify your portfolio. To learn more about ETFs, watch the Bid & Ask video 'What is an ETF?' by Silvia Bosoni, Group Head of ETFs at Euronext.
Indices and ESG: a natural combination?
First, let's define ESG. It stands for Environmental, Social and Governance.
- The 'E' part refers to the impact of the activities of a specific company on its direct, but also indirect environment. It measures the impact of climate change. carbon emissions, deforestation, water management, air and water pollution.
- The 'S' part is the impact of a company on its social ecosystem, for instance its capacity to onboard client engagement or even employee engagement, and more broadly to what extent it respects labour standards and human rights.
- The 'G' part includes all the best practices in terms of managing a company, such as diversity in the board of directors or policy in terms of compensation.
ESG considerations
These ESG considerations are widely used by investor communities, both to identify companies at risk, but also to identify those companies that are making the best use of these new opportunities. ESG also encourages companies to be more accountable in their business activities and their impact on economies.
Therefore, ESG indices, because they are composed of the most advanced companies following the ESG theme, help investors to directly identify companies that are leading the sustainable transition.
Does Euronext create indices?
Euronext is a major index provider in Europe. We design, calculate and publish a wide range of indices for all types of sectors, geographies and thematics.
Euronext's national indices
Euronext is well known for its flagship national benchmark indices in Europe: the CAC 40® in France, AEX® in the Netherlands, BEL 20® in Belgium, OBX® in Norway, PSI® in Portugal and ISEQ 20® in Ireland.
For decades, these indices have been considered as a reference for these local markets and as a consequence have been key to investment from both global and local market players.
Euronext ESG indices
Euronext is also recognised for its engagement and offering in terms of ESG indices. Fifteen years ago we created the Low Carbon Europe 100 index, which today serves as underlying for one of the biggest ETFs in Europe. In 2021, we began to create sustainable versions of all our national blue-chip indices, starting with the CAC 40® ESG, and including the MIB® ESG in Italy. And of course, Euronext continues to launch indices on new ESG-related topics, such as the new biodiversity and social indices launched just recently.
Euronext's expertise
Euronext has great expertise in creating customised solutions, with very quick time-to-market delivery for asset managers and pension funds to create structured products, ETFs, derivatives and more. As a recent example, in 2021 the German government called upon Euronext to create a World ESG index to help pension funds transition to sustainable investments.
This list is long, and Euronext will not stop here.