The indexes of the United States market are the most well-known of all. If you are remotely familiar with the financial or investing world, then you must have heard about the S&P 500, Dow Jones Industrial Average or the Nasdaq Composite.
However, never forget that the world is bigger than the United States. In Europe a well-known index is the Euro Stoxx 50. In Asia there is one index that really stands out: the Nikkei.
This blog about finding out more about what these indexes represent and how these indexes stack up to each other performance wise. Let’s find out more.
Indexes of the United States
Standard & Poor’s 500 (S&P 500)
The S&P 500 needs no real introduction. The S&P 500 represent the 500 largest companies in the United States. Currently, about 90 different sectors are included in the index. The S&P 500 was first published on March 4, 1957.
The list of companies that are included in the S&P 500 are determined by the S&P Index Committee. People in this committee have roles as economists or analysts at S&P.
Dow Jones Industrial Average (DJIA)
On May 26, 1896 the DJIA was first published. The list of 30 companies are selected by the S&P Dow Jones index committee. There is only one criterium – the DJIA needs to be an adequate representation of the US economy.
Companies that are included in the index are Microsoft, Coca-Cola, JP Morgan Chase, Procter and Gamble, Walt Disney, etc. Changes in the list of 30 companies representing the index are rare.
The NASDAQ Composite index was established at the same time as the Nasdaq – February 5, 1971. Companies listed on the exchange are predominantly those active in technology. The companies in the index are weighted based on their size.
Index of Europe
Euro Stoxx 50
The Euro Stoxx represents the 50 largest companies in Europe. The index was established in February 28, 1998 and is maintained by Stoxx Ltd. (part of Deutsche Borse and the Swiss exchange). The index covers 12 countries in Europe.
The majority of the index comprises of companies in France, Germany, The Netherlands and Spain. Companies that are included in this index are AB InBev, ASML, Ahold Delhaize, Allianz, etc.
Index of Asia
As the name already suggests, this index represents the largest 225 companies that are listed on the stock exchange in Tokyo. The index was established in September 7, 1950 but was retrospectively calculated from May 16, 1949.
The index is maintained by a newspaper called Nihon Keizai Shimbun (Nikkei). Technology stocks represent a large part of the index because of their market capitalization.
Companies that are included in the Nikkei 225 are Toyota, Softbank, Nippon Telegraph and Telephone, Honda, etc.
How do these indexes compare from a performance perspective?
I’m pretty curious how these indexes of these different regions compare to each other. Of course, it’s evident that for example the S&P 500 does not represent only the United States. Almost all companies included in the S&P 500 operate all over the globe. Still, I’m curious nonetheless :).
First, I will compare the indexes per region and afterwards, put the 3 regions together.
Performance of US indexes
1. S&P 500
3. NASDAQ 100
As you can see from the table above, the DJIA performed best with a Compound-Annual-Growth-Rate (CAGR) of 6.95%. Over a period of 20 years – with 2 crises – that’s not bad. Nevertheless, the NASDAQ index took a big hit in the dot com bubble of 2000-2001 and took a very long time to recover!
Even though, the technology sector was exploding and the NASDAQ index benefitting tremendously, it was just too far behind because of what happened in ’01. Therefore, preserving capital is essential! Even for a long-term investor like myself. That’s exactly why I rebalanced the investment portfolio of my kids!
Performance of EU indexes
1. Euro Stoxx 50 (FEZ)
The performance of a period of 16 years is decent. CAGR of 6.15% with $10K turning into $27,5K. Because of the uncertainty in Europe in the aftermath of 2008 the returns kept swinging up and down. The Greek financial debt crisis from 2010 onwards surely didn’t help either.
Performance of Asian indexes
Ufortunately, there is no ETF tracking the Nikkei 225 listed on PortfolioVisualizer.com. As a result, I’ve selected an ETF tracking the Nikkei 400. The Nikkei 400 tracks a diversified group of 400 Japanese companies.
1. Nikkei 400
As you can see in the CAGR, the growth per year was a fairly low 4.77% over a period of 17 years. Perhaps it’s just me, but I expected a lot more from Japan. But then again, I’m not yet (sufficiently) familiar with the economy in that region.
Putting it all together!
I’ve selected the following 3 indexes for the combined overview:
2. Euro Stoxx 50
3. Nikkei 400
It’s obvious that the Dow Jones Industrial Average is the clear winner. In contrast, the Nikkei 400 being the absolute loser.
However, I’m intrigued by the fact that the Euro Stoxx 50 was waaayyy ahead from 2007-2009. The best year of the Euro Stoxx 50 was even 43.43%. That’s enormous! Imagine missing out during that year because you were trying to time the market!
I think it’s safe to say that – at least historically speaking – indexes of the United States are the way to go. First of all, these indexes contain very high quality companies. Finally, the performance of these benchmarks is precisely why 90% of active investors fail to beat them.
A key contributing factor to the superiority of US large-cap companies
With the position that technology companies such as Google, Apple. Facebook, Microsoft and Amazon have in the United States and globally, I’m not seeing that change very soon (if at all).
impact of Regulations
In my view, an important factor contributing to the superiority of tech firms in the US is regulation. The lack thereof to be precise.
With privacy regulations such as GDPR, companies innovating with cryptocurrencies not even being able to open a bank account in The Netherlands, impractical tax regulations regarding stock options, etc., there are just a lot of hurdles to overcome to scale a business quickly and effectively to compete with, for example, Google.
I’m not saying these regulations are necessarily bad. However, I do say that Europe has a long way to go to build a European based company that can successfully compete with Apple or Facebook.
Europe is just too busy to create a perfect level playing field between EU member states (which is just never going to happen), while it’s losing the battle on a global level.
In the Europe we need to be a lot bolder in business and innovation. Act first and ask for forgiveness later.
To my readers, what are your views on the competitive edge of Europe compared to the rest of the world? Please let me know in the comments below.