By Chris Flood

Standard & Poor’s, the index provider, has launched a new liquidity weighted European equity index, designed to provide exposure to 75 of the eurozone’s most heavily traded blue chip companies.

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Gareth Parker, director at S&P indices, said ETF providers wanted a European equity index with the maximum possible underlying liquidity. This would make it easier and cheaper for investors such as hedge funds to trade in and out of ETFs based on the index.

Mr Parked said some of the constituents of well known European equity indices could be relatively illiquid at times, which could have a direct impact on trading costs.

The constituents of the new S&P Euro 75 index are weighted according to their average daily trading volumes over the past three months across all European trading venues. The index will be rebalanced annually.

The biggest stock within the S&P Euro 75 is Telefonica of Spain with a weighting of 6.54 per cent, followed by Total of France at 5.63 per cent and Siemens of Germany at 3.84 per cent.

There is considerable overlap between the S&P Euro 75 and the Dow Jones Euro Stoxx 50, the European equity index most widely followed by ETF investors, which has the same top three consituents but in a different order (Total, Siemens, Telefonica).

But according to Mr Parker, the new S&P Euro 75 is a response to a “a market desire for a broader, more representative tradable index.”

S&P has backtested the new liquidity index and found that its performance is broadly similar to a traditional market cap weighted index such as the S&P Europe 350 index.

Over the past seven years, the S&P Euro 75 would have delivered annual returns of about 6.5 per cent compared with 5.8 per cent for the S&P Europe 350.

The new index is the latest in a growing range of benchmarks that are being created as alternatives to traditional market capitalisation weighted indices.

However, unlike so-called fundamental indices, which weight constitutents by measures such as earnings or book value, the S&P Euro 75 makes no claims to be a better mousetrap.

The aim is to provide an index that will offer much the same return as market cap weighted indices, but with greater underlying liquidity.

Providers of fundamental indices generally point to potential outperformance over traditional indices.

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