STOXX® EUROPE 600 – Q&A with Dr. Jan-Carl Plagge
Dr. Jan-Carl Plagge, Head of Applied Research
STOXX’s Head of Applied Research answers questions on what has made the STOXX® Europe 600 the benchmark for Europe.
The STOXX® Europe 600 Index has become, since its introduction in 1998, the benchmark of choice for global investors approaching Europe as the ever more integrated and homogenous economic bloc that it is. The index is a broad, yet tradable representation of the European equity market and its subsequent sectors, and accessible via the futures and options markets.
We talked to Dr. Jan-Carl Plagge, Head of Applied Research at STOXX Ltd., about the nature and composition of the STOXX Europe 600 and recent investor interest around the benchmark.
– What would you highlight about the STOXX Europe 600’s composition and characteristics that are driving investor interest in the index?
“The STOXX Europe 600 is a developed-market index that includes shares of the 600 largest and most liquid companies in developed Europe.1 The index covers approximately 90% of the investable market capitalization of the underlying equity market. It offers a good tradeoff between market coverage and tradability. In order to address liquidity, we introduced a minimum threshold of 1 million euros average daily trading volume (ADTV) for stocks to be included into the index.
“In terms of risk and return, the STOXX Europe 600 behaves in a similar way to the underlying total market index – the STOXX® Europe Total Market Index. But due to the focus on the largest 600 stocks and the introduction of a minimum liquidity threshold, it offers these characteristics with a substantially higher turnover in the underlying shares. With a median ADTV of 20.1 million euros, turnover is about 150% higher than the median ADTV of just 8.1 million euros for shares in the STOXX Europe TMI.
“This tradable, yet comprehensive representation of the underlying market is a key component of the attractiveness of the index. This appeal is enhanced by the traded contracts in options and futures: the STOXX Europe 600 is by far the most liquid broad developed European benchmark, with more than 11.7 million traded futures contracts and about 100,000 options traded last year.”
– Can you elaborate on how European countries and industries have displayed diverse risk and return characteristics over the last decade?
“An important characteristic of the index is its diversity, not only across industries but also across countries.
“The STOXX Europe 600 is broadly diversified across 17 developed European nations. The UK is the largest market (representing about 29% of the overall index market capitalization), followed by France (16%), Germany (14%) and Switzerland (14%). Its country allocation is very similar to that of the entire developed European equity market. In terms of performance, the UK also contributes the most to overall index performance.
“Among industries, financials display the highest contribution to the overall performance. While this segment contributed substantially to the index’s positive returns in the pre- and post-financial crisis periods, it also drove drawdowns in 2008 and during the European debt crisis in 2010 and 2011. The performance contribution of the remaining industries has been less pronounced and was mainly homogenous in direction.”
– In today’s environment of very low interest rates, investors increasingly focus on high-dividend yielding equity as an alternative to fixed income. How does the STOXX Europe 600 stack up against other benchmarks?
“In this context, Europe offers very attractive characteristics. Compared to the US but also compared to the aggregate of global developed markets, Europe offers persistently higher dividend yields. With an average of 3.7% in 2016, the dividend yield of the STOXX Europe 600 was one percentage point higher than that of the MSCI World (2.7%) and 1.4 percentage points higher than the yield of the S&P 500 (2.2%).”
– Lastly, the UK referendum on EU membership was a major disruption to European equity markets in 2016. How has ‘Brexit’ impacted the STOXX Europe 600?
“The UK referendum surely had an initial negative impact on the performance of the STOXX Europe 600, as it had on other major benchmarks around the world. However, our analyses of the Brexit event on stock-price performance indicate that the immediate negative impact was higher the higher domestic revenue exposure was for UK stocks. Companies with high revenue exposure to foreign markets drew down significantly less and, in many cases, even realized stock price increases to levels above those prior to the referendum.
“When analyzing the revenue of STOXX Europe 600 constituents, we find that, on a market-cap weighted basis, the exposure to the UK is lower than what one might expect. In fact, STOXX Europe 600 constituents generate only about 50% of their revenues within developed European countries. Quite surprisingly, with as much as 19%, STOXX Europe 600 companies are more exposed to the US than to any single European country. This international exposure certainly helped to mitigate the negative effect on performance stemming from the Brexit event.”
1 ‘Developed Europe’ currently includes the following countries: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the UK.