Feasibility Study for the creation of a CMU Equity Market Index Family : executive summary.
Date: 2020-07-20
Institutions: Directorate-General for Financial Stability, Financial Services and Capital Markets Union
Subjects: European Union, capital market, economic indicator, feasibility study, share

Feasibility study for the 
creation of a CMU Equity 
Market Index Family 

Executive Summary 

A study prepared by CEPS in collaboration with Prof. Aleš Berk Skok, 
Prof.  Igor  Lončarski  and  NorthGrant  Consulting  for  the  European 
Commission,  Directorate-General  for  Financial  Stability,  Financial 
Services and Capital Markets Union 

June 2020 

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Feasibility study for the creation of a CMU Equity Market Index Family 

AUTHORS 
This report is written by Willem Pieter de Groen (Project Manager, CEPS), Cinzia Alcidi 
(Project  Director,  CEPS),  Aleš  Berk  Skok  (subcontractor,  CEPS),  Igor  Lončarski 
(subcontractor, CEPS), Inna Oliinyk (CEPS), Roberto Musmeci (CEPS) and Mattia Di Salvo 
(CEPS). 

They  were  supported  by  Peter  Groznik  (NorthGrant),  Boštjan  Hazabent  (NorthGrant), 
Sashko Stojanovski (NorthGrant), Cosmina Amariei (CEPS), Beatriz Pozo (CEPS), Silvia 
Tadi  (CEPS),  Apostolos  Thomadakis  (CEPS),  Daniel  Gros  (CEPS)  and  Karel  Lannoo 
(CEPS). 

The authors would like to thank all the consulted stakeholders for their inputs to the study. 

EUROPEAN COMMISSION 

Directorate-General for Financial Stability, Financial Services and Capital Markets Union 
Directorate E — Financial systems and crisis management 
Unit E.2 — National financial systems 

Contact: Filip Keereman 

E-mail:  FISMA-E2@ec.europa.eu 

European Commission 
B-1049 Brussels 

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Feasibility study for the creation of a CMU Equity Market Index Family 

Executive summary 
Only a selection of listed companies is included in the European equity indices 
managed  by  international  index  providers.  Due  to  the  underlying  index 
methodology currently in use, existing equity indices mostly comprise large caps listed 
on developed markets.  

Only about half  of the  equity markets  in the EU  are classified as developed markets; 
(DM) the others do not meet the respective DM criteria as defined by index providers 
such as MSCI and FTSE Russell. This happens even though such markets are similar to 
the DM members of the European single market and meet their qualitative criteria, and 
means that most companies are excluded from  well-known international indices. This 
has an impact on smaller fragmented capital markets such as those in the Baltics states, 
Central, Eastern and South Eastern Europe.  

It  is  worth  highlighting  that  in  most  cases  index  providers  construct  and  maintain 
country indices separately and then aggregate them into various regional composites. 
However, there are special circumstances in which European countries classified as DM 
and countries in the West African Economic and Monetary Union (WAEMU) are classified 
as single markets and constructed according to a combined equity universe – an ongoing 
approach by MSCI reinforced during the 19 February 2019 public announcement.  

This  allowed  for  WEAMU  countries’  securities  to  be  included  in  global  indices  by  the 
MSCI, even though none of these countries would have met the size and liquidity criteria 
individually. This approach is appropriate for the EU member states and will be further 
promoted via the CMU Index Family proposal. 

Exclusion  from  indices  puts  markets  and  individual  stocks  at  a  significant 
disadvantage.  Since  they  are  less  often  considered  by  international  institutional 
investors, the capital supply and liquidity in the market are reduced.  

Objective 
The creation of an equity index family as part of the Capital Markets Union (CMU) project 
could  improve  index  weights  for  EU  countries  when  compared  to  standard  indices.  
The overall aim of this study is to assess the feasibility of creating a CMU Equity Market 
Index Family, guided by two specific objectives, namely to: 

•  Develop an index setup for a CMU Index Family with the definition of the 

investible universe, the set of inclusion criteria and weighting.  

•  Assess  the  market  potential  of  the  CMU  Index  Family  and  estimate  the 

magnitude of the retail and institutional investor base expected to use it.  

The CMU Index Family could contribute to the development of EU capital markets in line 
with the CMU project, including the development and integration of local capital markets 
within the EU. 

Methodology 
The  feasibility  of  creating  an  CMU  Equity  Market  Index  is  assessed  using  an 
extensive  set  of  quantitative  and  qualitative  data  collection  and  stakeholder 
consultation  tools.  The  EU-listed  companies,  equity  indices  and  index-related 
investments have been mapped to determine the opportunity for a CMU Index Family. 
Moreover,  a  simulation  was  conducted  to  understand  the  likely  composition  and 
performance over the past five years. Additionally, interviews, surveys and workshops 
were conducted with about 125 stakeholders to collect information and validate all the 
different aspects of the CMU Index Family. 

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Feasibility study for the creation of a CMU Equity Market Index Family 

Status quo 
There  are  about  6 300  listed  companies  in  the  EU-27  and  the  UK.  About  two-
thirds of these companies are listed on regulated markets, with the remaining one-third 
listed on SME Growth Markets. Regulated markets account for the large majority of the 
market  capitalisation,  however.  In  fact,  regulated  markets  are  responsible  for  nearly 
99% of the total market capitalisation, amounting to about EUR 15 trillion.  

Brexit has reduced the number of companies listed on EU-regulated markets 
and SME Growth Markets significantly. The number of listed companies decreased 
from about 6 300 to 4 200 in the EU-27, which is about a third lower than before the 
UK’s  exit.  In  fact,  the  UK  has  about  1 900  listed  companies,  which  is  more  than  the 
approximately 1 400 companies in the 15 frontier and emerging markets in the EU. 

The  large  majority  of  the  listed  companies  consist  of  micro  caps  (up  to  EUR 
100  million  market  capitalisation)  and  small  caps  (between  EUR  100  million 
and EUR 1 billion). Only about one-third of the companies listed on regulated markets 
is  mid-cap  (between  EUR  1  billion  and  EUR  5  billion)  or  large-cap  (more  than  EUR  5 
billion), but these companies account for 96% of the market cap. The stocks listed on 
SME  Growth  Markets  are  basically  all  micro  and  small  caps,  but  the  1%  of  mid-caps 
account for about one-quarter of the market cap. 

Approximately 5 000 indices include EU-listed companies. About a fifth of these 
indices  is  provided  by  stock  exchanges,  which  mostly  focus  on  the  stocks  listed  on  a 
single market or a sub-set of these stocks. It is noteworthy that emerging and frontier 
stock exchanges generally have fewer indices  than the developed market exchanges. 
However, the large majority  of the indices is  supplied by independent providers (e.g. 
Stoxx and MSCI). These independent providers often issue indices that cover companies 
from multiple stock exchanges.  

Stock exchanges and independent providers both issue all share, size, thematic 
and  sectoral  indices,  but  neither  covers  the  stock  exchanges  from  all  EU 
countries. The regulated markets in most frontier countries (e.g. BG, HR, RO, SI, SK) 
as  well  as  SME  Growth  Markets,  are  not  covered  or  are  only  partially  covered  by 
independent providers. Moreover, European indices often cover a combination of EU and 
non-EU countries. 

Indices  are  primarily  used  as  a  benchmark  and  to  track  a  certain  set  of 
companies.  Looking  at  the  EU  index-related  investments  in  mutual  funds  and  ETFs, 
mutual funds benchmarked against equity indices account for 85% to 90% of the equity- 
related investments, and ETFs tracking equity indices account for the remaining 10% to 
15%.  However,  the  share  of  ETFs  has  been  growing  rapidly  in  the  past  few  years  – 
especially for thematic ESG-driven ETFs. 

Most of the indices used by mutual funds and ETFs benchmark/track developed markets, 
whereas frontier markets, and to some extent emerging markets, are virtually 
non-existent. 

The  business  models  of  the  index  issuers  rely  on  three  main  components.  First,  the 
stock  exchanges  that  issue  indices  traditionally  do  so  primarily  to  attract  more 
investment  to  their  stock  markets.  These  indices  are  thus  sometimes  free  for 
benchmarking  and  tracking  use.  Second,  for  independent  providers  the  issuance  of 
indices constitutes an important source of revenue. In general, they charge a fee for 
the use of indices as a benchmark or track an index. Third, the sale of data on 
the indices, but especially the underlying companies, is an important source of revenue 
for both stock exchanges and independent providers. 

As  a  note,  the  current  CMU  Index  Family  proposal  is  a  timely  initiative  given  the 
opportunity  to  accelerate  discussions  about  introducing  an  EU-consolidated  tape 

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Feasibility study for the creation of a CMU Equity Market Index Family 

which is currently under consultation for the review of MiFID II – as calculating the CMU 
Index requires uniform data format and real-time feed mechanism. 

CMU Index Family opportunity 
The fact that there is no  equity-based index covering all EU countries does not mean 
there is no demand for a CMU Index Family. It appears that in the current market 
structure, supply for such an index does not match the limited demand.  

Most of the larger institutional investors consulted for this study indicated that 
there was no real need to create a CMU Index Family as they are satisfied with 
the current indexing landscape.  For large investors there  are too many differences in 
EU equity markets for them to think in terms of a homogenous market landscape. When 
it comes to investing in frontier markets and micro and small caps, the main obstacles 
for  investors  are  limited  liquidity  (major  price  impact  when  trading);  free  float 
(concentration  of  stock  holdings);  institutional  aspects  (market  openness,  limits  on 
capital flow, specific local regulatory and infrastructural barriers etc.); and unfamiliarity 
with  markets  and/or  companies  (risk  and  risk  perception).  Moreover,  if  they  wish  to 
create a CMU Index Family covering all EU countries, they would ask an independent 
provider to construct such an index for them. 

Nevertheless, there seems to be some potential for a CMU Index Family among 
domestic and regional investors (especially from the CEE region). The domestic 
and regional investors show an interest in indices that also cover frontier and emerging 
EU markets, but have fewer assets under management and are less willing to pay for 
the use of indices. 

Domestic,  regional  and  international  investors  all  see  a  further  rise  of  index-based 
passive investment products and increased interest in ESG investments. 

CMU Index Family strategy and methodology 
The proposed CMU Index Family consists of 38 indices in total.  

The  CMU  All  Share  Index  comprises  the  main  index  of  the  index  family,  covering 
around 3, 600 companies listed on EU-27 regulated markets and SME Growth Markets. 
Apart  from  solely  UK-listed  companies,  another  600  companies  with  their  legal 
headquarters outside the EU or with an average daily liquidity of less than EUR 1 000 
have been excluded. All the other thematic, size, sectoral and convergence indices are 
made up of a sub-set of companies included in the CMU All Share Index.  

The CMU ESG Index forms the main thematic index of the CMU Index Family. There is 
a growing demand for ESG investments, but still a significant challenge in measuring 
the ESG performance of companies. The current methodology is therefore simply based 
on the sector in which the company is active. In simple terms, the higher the pollution 
of the sector, the lower the weight in the index. As soon as the ESG-related disclosure 
of  companies  becomes  more  harmonised  and  comprehensive,  the  methodology  could 
be revised to consider all relevant aspects. There are already several policy initiatives 
in this direction.  

The CMU ESG Index can also leverage on the EU Green Deal backed by the European 
Commission. 

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Feasibility study for the creation of a CMU Equity Market Index Family 

Figure 1 CMU Index Family 

Source: CEPS (2020). 

There are five different types of size indices. The CMU Micro Cap and CMU Small Cap 
indices  cover  all  eligible  micro  and  small  caps,  respectively.  The  CMU  SME  Growth 
Markets  cover  all  eligible  companies  listed  on  all  markets  registered  as  SME  Growth 
Markets. The CMU Small National Capital Markets and CMU Mid National Capital 
Markets cover the smaller EU equity markets based on the total market capitalisation 
of  the  companies  listed  in  these  countries.  The  two  national  capital  markets  indices 
combined cover all the EU frontier and emerging markets, except for Poland. 

There are 12 different types of sectoral indices. These sectors have been based on the 
NACE  classification  of  companies,  differences  in  the  nature  of  their  activities  and  the 
extent  to  which  they  are  active  companies  for  the  sector.  The  main  sectoral  indices 
include  the  CMU  Manufacturing  Index,  CMU  Energy  Index,  CMU  Utility  Index, 
CMU  Construction  Index,  CMU  Trade  Index,  CMU  Logistics  Index,  CMU  ICT 
Index, CMU Banks & Financial Services (excl. insurance) Index, CMU Insurance 
Index, CMU Real Estate Index, CMU Health and Social Services Index, and CMU 
Services Index. 

With the exception of the CMU All Share Index, all the main indices include companies 
of  which  the  stocks  have  an  average  daily  trading  value  of  at  least  EUR  50 000. 
However,  to  stimulate  market  integration,  every  main  index  is  also  featured  as  a 
convergence index, covering all the companies with less liquid stocks. In convergence 
indices the average daily trading value  of included stocks  ranges between EUR 1 000 
and EUR 50 000. Based on the trading values in the second half of 2019, about 45% or 
1 600 companies would be covered by these convergence indices. 

The indices are calculated as a price, gross return (including dividends) and net return 
(adjusted for dividend tax) indices. 

All  the  indices  are  in  principle  weighted  based  on  the  free-float  adjusted  market 
capitalisation. The weight is capped at 10% of the index for a single company and 40% 
for the top five companies with the largest weight. This concentration capping ensures 
that  more  balanced  indices  can  be  used  for  UCITS  funds.  The  CMU  Index  Family  is 
conceived to be revised every six months. 

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Feasibility study for the creation of a CMU Equity Market Index Family 

CMU Index Family performance 
The CMU All Share Index (price index) would have had a return of about 19.4% or 
an annualised return of 3.6% per year over the past five years, excluding costs 
and dividends. The return could have been about three times as high, if the index had 
not declined rapidly in response to the COVID-19 virus outbreak and related lockdown 
measures in early 2020. 

The return is higher when the received and re-invested dividends are also included. The 
CMU All Share Index (gross return) would have had a return of 34.5% between April 
2015 and March 2020 - about 80% higher than the price index. If the gross dividend 
tax rates are also considered, the net return would still be 29.8%, or almost 55% higher 
than the price return index. 

The CMU All Share Index would also have performed well compared to some of 
the large international indices. The CMU All Share Index followed more or less the 
same developments as the MSCI World Index, S&P 500 Index and STOXX Europe Index. 
In terms of performance, it would probably have outperformed the MSCI World Index 
and STOXX Europe Index, and had the same performance as the S&P 500 Index. 

Turning  to  the  sub-indices,  both  the  CMU  Convergence  Index  and  CMU  ESG 
Index outperformed the CMU All Share Index in terms of return. The size indices 
show a large range of positive returns, both above and below the CMU All Share Index. 
The sectoral indices also show a large range of returns, including some indices with a 
negative  performance  (CMU  Construction,  CMU  Logistics,  CMU  Banks  &  Financial 
Services  [excl.  insurance],  CMU  Insurance).  This  includes  many  sectors  that  were 
impacted heavily by the COVID-19 outbreak. 

The liquidity of the CMU All Share Index and convergence indices is a concern. 
About half of the companies included had one or more days without trades over a period 
of six months. More than 35% of the stocks included in the majority of the convergence 
indices even had 10 or more non-trading days. 

Significantly,  good  past  performance  is  no  guarantee  of  future  performance. 
Moreover, the indices have different risk-return relations and the returns of the index- 
based  investment  products  often  deviate  from  the  index  return  (tracking-error, 
replication costs, etc.). Furthermore, the index returns might be somewhat affected by 
the  simplification  of  the  index  calculation.  The  index  returns  were  calculated  for  the 
entire five-year period based on their composition at the end of 2019, which might give 
rise to a survivorship bias and over-weighting of good performers in the index. 

CMU Index Family potential 
Based  on  indications  from  investors  there  is  a moderate  interest  in  the  CMU 
Index  Family.  Nevertheless,  the  index  could  have  a  significant  impact  on  the 
development and integration of the smaller EU equity markets, noting the impact that 
a few very small funds already have in these markets.  

Under optimal conditions the CMU Index Family could, according to investors, attract as 
much as EUR 725 billion or 13% of the total free- float-adjusted market capitalisation 
in  institutional  investments.  For  this,  the  CMU  indices  would  have  to  attract  as  much 
investment  as  the  most-used  comparable  indices.  The  investors  would  track  or 
benchmark one of the indices. 

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Feasibility study for the creation of a CMU Equity Market Index Family 

Figure 2 Indicated investor interest in CMU Index Family 

13%

Maximum 
€724 bn 

Total market cap  
€5 384 bn 

Note: The market capitalisation is free-float adjusted. 
Source: CEPS (2020). 

There  seems  to  be  little  to  no  potential  for  the  CMU  All  Share  Index  to  be 
tracked. This is largely due to difficulties associated with the replication of the index. 
Looking  at  existing  investments,  no  indices  with  more  than  3 000  companies  attract 
significant investments. If the CMU All Share Index is replicated, it is likely that investors 
will limit themselves to a  sub-set of  companies.  This is possible as the mid-caps  and 
large-caps  represent  25%  of  the  included  companies  (800)  and  96%  of  the  index 
weights.  Additionally,  some  investors  might  want  to  use  it  as  a  more 
comprehensive benchmark to inform their investment performance. The sub-
indices  with  fewer  companies  could  attract  more  investment.  The  CMU  ESG 
Index could attract the most investment. 

The extent to which the potential of the CMU Index Family is realised largely 
depends  on  the  conditions.  These  include  governance,  the  quality  of  the  index 
provider  selected  to  set  up  the  index,  and  marketing.  But  also  the  pricing  and 
communication/sales strategy. If the entire or part of the CMU Index Family were to be 
offered free of charge – even for an initial transition period  – this could contribute to 
attracting significantly more investment. The willingness to pay for the use of indices 
among the most interested national and regional institutional is often limited, however. 

CMU Index Family implementation roadmap 
Based  on  the  feasibility  assessment,  it  seems  unlikely  that  any  of  the  established 
private-index providers will issue the index family as an own initiative. This leaves the 
public-private  partnership  as  the  most  feasible  governance  model  for  the 
creation  of  the  index  family.  In  such  a  partnership,  the  private  partner  would  be 
responsible  for  the  creation,  maintenance  and  exploitation  of  the  CMU  Index  Family, 
while  the  public  stakeholders  could  provide  initial  financial  and  marketing  support  as 
well as high-level guidance to ensure consistency with public policy objectives. 

This  study  proposes  the  creation  of  an  implementation  task  force  to  launch  the  CMU 
Index Family. The task force should explore which public and private parties would be 
willing  to  create  the  CMU  Index  Family.  The  European  Commission  and/or  the  EBRD 
could offer logistical and secretariat assistance to such a task force.  

If public stakeholders can be found, and decide to pursue the creation of the complete 
CMU Index Family, they would have to take several steps to realise the public-private 
partnership  and  create  the  CMU  Index  Family  that  is  included  in  the  implementation 
roadmap. 

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Feasibility study for the creation of a CMU Equity Market Index Family 

LEGAL NOTICE 

Manuscript completed in June 2020 

This  document  has  been  prepared  for  the  European  Commission  however  it  reflects  the  views  only  of  the 
authors, and the Commission cannot be held responsible for any use which may be made of the information 
contained therein. 
The European Commission is not liable for any consequence stemming from the reuse of this publication.  

Luxembourg: Publications Office of the European Union, 2020 
© European Union, 2020 
Reuse is authorised provided the source is acknowledged. The reuse policy of European Commission 
documents is regulated by Decision 2011/833/EU (OJ L 330, 14.12.2011, p. 39). 

For any use or reproduction of photos or other material that is not under the copyright of the 
European Union (*), permission must be sought directly from the copyright holders. 

PDF   ISBN 978-92-76-03741-5 doi:10.2874/724400   catalogue number: EV-01-19-457-EN-N

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Feasibility study for the creation of a CMU Equity Market Index Family 

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