What is a market index and how to invest in it?

Fabrice Rahmouni, Head of Indices at Euronext, explains what is an index, how indices are used and how to invest in them.

What is an index?

An index can be described as an indicator. Concretely, it can be 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, sectors, 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 they used?

Indices can serve as market indicators – the famous barometer giving information about the health of financial markets; they can be used as benchmarks to compare the performance of, for instance, a fund; they can also be used as an underlying for financial products like ETFs or Warrants and Certificates; and finally they can be used as tools to calculate financial metrics for research and analysis.

So, whether you are looking to track a performance of a specific theme, evaluate the performance of your portfolio, or even invest directly into index-based products, indices are key financial tools.

How do you invest in an index?

An index is not a financial product that you can directly invest in per se. It can’t be bought or sold, like a stock. However, there are solutions that allow you to replicate the performance of indices, such as exchange-traded funds (the famous ETF), warrants and certificates, or derivatives products like futures and options.

Let’s focus on ETFs: an ETF is basically a fund that you can buy or sell like a stock on the exchange. ETFs serve to replicate and track the index performance and are a very popular product among the investor community. They offer exposure to a wide number of securities and markets, enabling the diversification of your portfolio.

Indices and ESG: a natural combination?

Let's first define “ESG”: it stands for Environmental, Social and Governance. 

The ‘E’ part measures the impact of the activities of a specific company on its direct, but also indirect environment. To be concrete, it measures the impact of climate change, carbon emissions, deforestation, water management, or air and water pollution.

The ‘S’ part measures 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, finally, 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.

So, it’s important to mention that these ESG considerations are becoming more widely used by investor communities for the identification of companies at risk, but also for identification of companies who could benefit from these new opportunities. ESG also encourages companies to be more accountable in their business activities and their impact on economies.

So all in all, ESG indices, because they are composed of the most advanced companies in these thematics, help investors to directly identify companies leading the sustainable transition.

Does Euronext create indices?

Yes, Euronext is a major index provider in Europe. We design, calculate and publish a wide range of indices of all types of sectors, geographies and thematics.

First, Euronext is of course famous for its seven 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, ISEQ 20® in Ireland and MIB® ESG in Italy. 

For decades, these indices have been considered as a reference for these local markets and as a consequence have been driving a huge part of global and local market players’ investments.

Secondly, 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. Since 2021, we have been creating sustainable versions of all our national blue-chip indices, starting last year with the CAC 40® ESG. And of course, Euronext keeps offering new ESG-related topics like biodiversity or social indices just launched recently.

Finally, Euronext has also great expertise in terms of 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.

Listen to the full interview. Watch the video.


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