Passive investing is a convenient, liquid and cost-effective way to invest in flagship indices that cover broad markets and blue-chip stocks, whether through ETFs, index funds, mandates or other passive vehicles. Investors should take note of the different features in selecting the right benchmark index.
So, how do the various indices differ?
Let’s have a look at two popular benchmarks for Eurozone equities – the MSCI EMU and the EURO STOXX 50.
The MSCI EMU is a broad market index, whereas the EURO STOXX 50 is a blue-chip index that includes the 50 largest companies in the Eurozone. Consistent with the premise that smaller companies tend to provide higher returns, the MSCI EMU has outperformed the EURO STOXX 50 by 80 bps per annum since January 1999.
As we show elsewhere, the indices are different with respect to market coverage. The MSCI EMU maintains a coverage of 85% of the total market capitalization, providing good market representation and diversification. But the market reach of the EURO STOXX 50 has fallen to 54% of MSCI EMU.
For investors choosing between broad market and blue-chip indices, it’s worth paying attention to the different features in order to make an investment decision.
Investors should be aware that past performance is not an indicator of future results.