Investing in FRA40: What to consider
The CAC 40 index, also known as the France 40 or FRA40 is a benchmark index, containing 40 of the largest companies traded on the Euronext Paris stock exchange. Alongside the DAX and FTSE, it is considered an important measurement for the overall health of the European economy. Its composition is aimed to reflect a balanced portfolio of French companies, and it is rebalanced once a quarter by a special committee. Each component is allocated weight, based on its relative market cap. Since it is an index and not a financial instrument, it is not possible to invest directly in it. However, there are several derivatives, such as futures contracts, ETFs and CFDs, which enable investing in the FRA40.
Who should include FRA40 in their portfolios?
Stock investors: Those who invest in individual stocks in the European market, namely, the Euronext Paris exchange, could consider using the FRA40 index as a hedging tool, to reduce risk and diversify their portfolios.
Long-term investors: Like in any developed country, the French economy aspires to constant growth. Since the CAC 40 index serves as a bellwether of the country’s economy, many long-term investors invest in it, believing it will show more growth over time.
Day traders: Since the FRA40 could show significant price movement over the course of a single day, some traders try to leverage these price movements in an attempt to turn a short-term profit.
Global economy investors: Some investors base their portfolios on investment products which track leading indices from around the world. The FRA40 index is a welcome addition to such a portfolio, as it represents one of the strongest economies in Europe.
What drives FRA40 price?
While based in France, the Euronext Paris stock exchange is part of the Euronext NV group, which also accommodates the Amsterdam, Brussels and Lisbon exchanges. Therefore, its close links to neighboring economies make its indices more exposed to continent-wide trends - especially those which affect the European Union. Moreover, many of the companies within its composition, while traded in Paris, have non-French owners. Some of the factors affecting its price include:
Rate decisions: The European Central Bank (ECB) is the most influential player in the European economy. Since it dictates the monetary policy that shapes the entire Eurozone, decisions such as interest rates will most likely impact leading indices in Europe, including the FRA40.
Wall Street: The American economy carries great significance in the global economy, and often sets the pace in global markets. Therefore, when markets in the US are up, they could lift European markets, and when they are down, Europe could follow. Since there’s a significant time difference between the US and Europe, the effects are sometimes felt in Europe the next trading day.
The Euro: Since 2002, most members of the EU use the Euro as their currency, including France. However, since it is in use in 19 countries, it could sometimes be affected by events in a specific country, while impacting all the others within the Eurozone - and subsequently impacting the FRA40 index.
Individual stocks: Since it contains stocks from 40 companies, a significant price movement in a single stock, especially one with a large weight allocation, could shift the entire index’s price.
FRA40: A benchmark by design
While many indices are considered benchmarks of their respective economies, the FRA40 is actually designed to be one. All of the companies within its composition are in the top 100 large cap companies traded in France, however, the 40 selected to be part of it are chosen not according to their size, but using an array of other criteria. The main guideline which the ‘Conseil Scientifique’ (the index’s governing body) uses when composing it, is ensuring it is “a relevant benchmark for portfolio management.” This means that factors such as diversification and risk management are given high priority when deciding which stocks to include and which to exclude. The committee rebalances the index once a quarter, to make sure it stays relevant to its guidelines. In a sense, the CAC 40 is a model portfolio for a thematic investment in large cap French companies.
History of FRA40
The CAC (Cotation Assistée en Continu, French for ‘Continuous Assisted Quotation’) was created in 1987. Also known as the France 40, this index was made to reflect the current state of the French economy, and initially had a total value of about 347 billion French Francs, with 1,000 base points. The index reached an all-time high of more than 6,000 points in the year 2000, but later crashed as part of the burst of the dot com bubble. In the latter half of the second decade of the 21st century, it reached an overall market cap of more than 1.2 trillion Euros.
Conclusion: FRA40 is a top European index
Being a leading European index and one that is designed to represent a well-balanced French stock portfolio, the CAC 40 is an index that serves its purpose of tracking the market. The fact that the criteria for the inclusion of stocks are not arbitrary, but rather, include specific considerations, make it a great tool for traders and investors who wish to have a better understanding of the French economy. Its composition, which includes global brands such as Airbus, L’Oreal and Renault, is not unlike a balanced portfolio for thematic investment in the French economy.
Alongside London’s FTSE index and the German DAX, the CAC is one of the main indicators of the overall well-being of the European economy. Since the European Union is geared towards growth, it could be assumed that the FRA40 index will continue to supply trading and investing opportunities for both long- and short-term investors.
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*This content is for information and educational purposes only and should not be considered investment advice or an investment recommendation.
*Past performance is not an indication of future results.