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.

Listen to the full interview. Watch the video.

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. 

What is an exchange and how can I invest on it?

Roland Prevot, Head of Retail Cash Equity at Euronext, explains what an exchange is, how to invest on-exchange and the advantages investing using the exchange brings, and why zero-commission investment is a myth.

Listen to the full interview. Watch the video.

What is an exchange?

An exchange is a marketplace where buyers and sellers come together to trade financial instruments.

Financial instruments include:

• Shares (a company’s capital)
• Bonds (a company’s debt)

There are also other products such as:

• Exchange-Traded Funds (ETFs), which are index funds that can be used to track indices such as the CAC 40
• Leveraged products, for example derivatives like options, and structured products (including warrants and turbos).

What is Euronext?

Euronext is a global stock exchange. We operate regulated markets in Paris, Amsterdam, Brussels, Lisbon, Dublin, Oslo and Milan.

How to invest on the exchange?

Investing on the exchange is simple. To invest on the exchange you need to ask your bank or broker to open a trading account or a stock savings plan. They may have direct access to the exchange or they may ask an intermediary to execute your stock exchange order on Euronext.

What are the benefits of investing on an exchange?

Liquidity

One of the main advantages of investing on the exchange compared to other methods is that the exchange market has the most liquidity. This means that it has more market participants, increasing your chances of being able to trade at the best price. This liquidity contributes to the quality of the market. 

Best execution

With Euronext you can also benefit from our best execution solution, called Best of Book. Best execution means that Euronext is the trading venue where you will have the best execution price.

Our 'Best of Book' service, designed for retail investors, delivers a real advantage to individual investors, allowing them to secure a better price than even a dedicated finance professional could achieve. 

Investing with zero commission: myth or reality?

Zero commission means investing using brokers with no brokerage fees.

Roland Prevot says that zero commission is a myth if you are looking for good execution quality.

The broker that sends your order to the exchange will aim to secure the best execution for you, and there will be a charge for that. With a "zero-cost" solution, not having to pay brokerage fees seems like an advantage, but ultimately, what you don't pay in brokerage fees, you will end up paying in the execution price. 

Final advice

Roland Prevot believes it is important to choose your broker carefully. Instead of focusing on brokerage fees, look at the terms offered by your broker before opening an account.

An introduction to Euronext MATIF

Nick Kennedy, Head of Commodities at Euronext, explains what Euronext MATIF is, and what agricultural commodity derivatives offer. 

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What is Euronext MATIF?

Euronext MATIF is the leading exchange for agricultural commodities in mainland Europe. It began as a French exchange (Marché à terme international de France), but it has deep European roots, and it is now an international name: if you speak to traders anywhere, not just Europe but also Singapore or Chicago, they'll know about MATIF grains. 

Our three largest agricultural commodity derivatives products are:

• Rapeseed
• Corn
• Milling Wheat.

We have built this franchise over nearly 30 years. Although we are relatively young compared to some of our peers, we are firmly established as the European benchmark, and in some cases the global benchmark, for these products.

What does Euronext MATIF offer and who uses it?

What makes Euronext MATIF really different from other product groups on Euronext is the user base, explains Nick Kennedy. At the core we have physical users of agriculture ranging from producers, cooperatives, trading houses, millers etc. These form the basis for our contacts.

These groups use the MATIF contracts for hedging, to cover their price risk.

However, we have also seen a real growth in financial users. This is because, in addition to hedging, MATIF contracts can be a great financial investment and can act as a proxy - a real accurate price - to price commodities in Europe through the use of futures and options. This is how we have become a global benchmark in this field. 

MATIF in a few figures

2020 was our all-time record on the franchise in its 27-year history. This was due to the significant internationalisation of the franchise, as well as the return of volatility. Our contracts are now being used more frequently and our user base has become much more diverse.

In terms of figures, for our Milling Wheat, which is our flagship contract, 55,000 lots are traded every single day - the equivalent of 45 Panamax vessels or, to put it in a French context. 10 million baguettes. If you imagine that in a warehouse, you can see that it's a very large amount. 

Looking forward

Physically-delivered contracts

Today, the franchise is made up of physically-delivered contracts, which is another specificity within the world of commodities. This means that if you are a holder - if you hold a position in Milling Wheat for example - and you keep it right to the expiry of the contract, then you'll go to delivery. This happens very rarely; it is designed to be able to, but it is more a proxy price reference. 

This is important because our core contracts will continue to be physically delivered, which works very well.

Cash-settled contracts

However, in addition, we are going to start offering cash-settled instruments. This will be great for new instruments, smaller instruments, niche instruments, spreads, as well as other types of instruments. 

To do this, we will work with an index provider. They will do the work of creating the index, and we will then encapsulate it in a very simple cash-settled platform..

The first cash-settled contract, which we will launch this year, will be Durum Wheat, which is used to make pasta. We will be doing this with a price reporting agency and there will be more news to come.

An introduction to cash-settled contracts

Caroline Bitton, Sales Manager - Commodities at Euronext, explains what a cash-settled commodity contract is and its advantages, and gives some insight into the new durum wheat cash-settled future contract that Euronext is launching. 

Listen to the full interview. Watch the video.

What is a cash-settled contract?

A cash-settled contract is a futures contract which allows the buyer and the seller to go to the expiry date without the need to start a physical delivery process. This means they can keep their position until the last day, and they have the guarantee of exiting their position at the expiry price.

How is the cash-settled contracts expiry price set up?

The expiry price is calculated by the clearing house which uses a BMR (Benchmark Regulation) index approved by the stock market regulatory authorities. 

The clearing house calculates the arithmetic average of this index based on the last month of trading. It then gives the expiry price at which the buyers and the sellers will exit from their position. 

What are the advantages of a cash-settled contract?

To start with, the advantages are similar to the advantages of a physical delivery contract. The cash-settled contract, just like a physically-delivered contract, works as a hedging tool to manage price risk.

However, settling the contract in cash removes the complexity associated with physical delivery, which can be unsuitable for certain markets for reasons such as logistics, market size, or because of the nature of the underlying product. 

Are there any contracts of this type at Euronext?

We are about to launch a Durum Wheat cash-settled future contract which uses a French-Italian durum wheat index produced by Sitagri Index Services.

How does a cash-settled contract work?

It works like all futures contracts - according to how the position taken by the buyers and sellers develops. The only difference is the calculation on the final day of trading. For example, if you have a December expiry, it will be the index average between the 1^st and the 31^st of December.

And what about historical contracts?

The Euronext MATIF contracts, Wheat, Corn, Rapeseed, involve physical delivery and will remain the same.

Thanks to the launch of our cash-settled platform, we can extend our range and offer new underlyings that are not feasible with physical delivery. 

What is Best of Book and how does it work?

Roland Prevot, Head of Retail Cash Equity at Euronext, explains what Euronext Best of Book is, how it works and the advantages for retail investors.

Listen to the full interview. Watch the video.

What is Best of Book?

Best of Book (BoB) is a functionality Euronext launched to improve the trading conditions for retail investors - those investors who are trading for their own account as private individuals.

With Best of Book, when a retail investor trades on the exchange, they will not only benefit from a better price, but will also have more shares available to trade, compared to those available to professionals.

Best of Book has been designed to guarantee best execution to retail investors when they trade on Euronext. 

What is best execution?

Best execution is a concept implemented by regulators that obliges retail brokers to execute their clients' orders on the trading venue which is the most favourable for the investor.

To do so, the broker needs to consider two elements:

1. The trading price at which the order will be executed.
2. The cost that the broker will have to pay to provide execution.

For instance, for a buy order (an order to buy a share), the best execution will be on the trading venue where the combination of price + cost is the lowest. 

How does Best of Book work?

To build Best of Book, we asked liquidity providers to agree to provide prices at the Euronext Best Bid and Offer (the EBBO) on Euronext's Central Order Book. Those prices are exclusively available for orders initiated by retail investors.

So when a retail investor places an order on Euronext. they have access to the pool of liquidity available to all professionals, plus an additional pool of liquidity reserved only for retail investors.

We have calculated that Best of Book improves the execution price for retail investors by around €1.60 on average (in 2021 the average was €3.00).

How can I benefit from Best of Book?

First. to benefit from Best of Book, you need to trade on Euronext.

Unfortunately, not all retail brokers guarantee that they will execute their clients' order on the exchange; sometimes they choose to trade on alternative trading venues.

So before opening an account with a broker it is best to make sure that the broker is able to trade on Euronext. whether directly or indirectly, and that the broker can deliver best execution via Euronext Best of Book.