By Christopher Vass, senior product manager
Germany’s stock market – perhaps like the country itself - is sometimes mischaracterised as solid and reliable, and perhaps overly dependent on industrial heavyweights. But as we highlighted in a post earlier this year, German stock market performance has been more than solid since COVID – in fact the second best performing Developed European market (as measured by FTSE GEIS) since the recovery began in late March. And that growth is in part due to a greater diversity than the stereotype of blue-chip industrial behemoths.
Source: FTSE Russell as of 13 August 2020 in USD. Past performance is no guarantee of future performance.
As seen by the table above, the number of constituents has increased significantly and mainly in the mid-cap segment. The weight of Germany in FTSE Developed All Cap has also increased from below 10% to close to 15% during the same time-period.
The other three major equity markets, shown below, haven't seen the same increase in constituents (both relative and in absolute numbers). The UK for example has fewer constituents in FTSE Developed Europe today then it did 15yrs ago.
Source: FTSE Russell as of 13 August 2020 in USD. Past performance is no guarantee of future performance.
The question worth answering, is if it historically has been beneficial to expand beyond large caps in Germany?
Source: FTSE Russell as of 13 August 2020 in USD. Past performance is no guarantee of future performance.
As the chart shows above the, FTSE Germany Small Cap and FTSE Germany Mid Cap has outperformed FTSE Germany Large Cap. Another point worth highlighting is that the outperformance has been achieved at a lower realized volatility. Realized standard deviation using daily returns tells us that FTSE Germany Small Cap had a standard deviation of 20.7% vs. 21.1% for FTSE Germany Large Cap.
To better understand the differences in performance, we have put together the tables below that illustrate the five largest Subsectors within each market cap index.
Source: FTSE Russell as of 13 August 2020 in USD. Past performance is no guarantee of future performance.
As there are more constituents in the Mid and Small cap Indices, they are more diversified across the different Industries. In the Large Cap Index, single names can dominate a single Industry. For example, how SAP represents 84% of the Large Cap Technology Industry. The Mid and Small Caps also provide exposure to New Economy Subsectors such as Semiconductors, E-commerce and Biotechnology.
A broader Germany equity exposure across the three market cap segments has historically benefited investors with better risk-adjusted returns as it has provided exposure to segments of the market not represented by Large Cap stocks.
Want to be informed about global markets? Subscribe to our blog
© 2020 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE Canada”), (4) MTSNext Limited (“MTSNext”), (5) Mergent, Inc. (“Mergent”), (6) FTSE Fixed Income LLC (“FTSE FI”), (7) The Yield Book Inc (“YB”) and (8) Beyond Ratings S.A.S. (“BR”). All rights reserved.
FTSE Russell® is a trading name of FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB and BR. “FTSE®”, “Russell®”, “FTSE Russell®”, “MTS®”, “FTSE4Good®”, “ICB®”, “Mergent®”, “The Yield Book®”, “Beyond Ratings®” and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, MTSNext, FTSE Canada, Mergent, FTSE FI, YB or BR. FTSE International Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator.
All information is provided for information purposes only. All information and data contained in this publication is obtained by the LSE Group, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, such information and data is provided "as is" without warranty of any kind. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or of results to be obtained from the use of FTSE Russell products, including but not limited to indexes, data and analytics, or the fitness or suitability of the FTSE Russell products for any particular purpose to which they might be put. Any representation of historical data accessible through FTSE Russell products is provided for information purposes only and is not a reliable indicator of future performance.
No responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for (a) any loss or damage in whole or in part caused by, resulting from, or relating to any error (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analysing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this document or links to this document or (b) any direct, indirect, special, consequential or incidental damages whatsoever, even if any member of the LSE Group is advised in advance of the possibility of such damages, resulting from the use of, or inability to use, such information.
No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing contained in this document or accessible through FTSE Russell Indexes, including statistical data and industry reports, should be taken as constituting financial or investment advice or a financial promotion.
Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back- tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index.
This publication may contain forward-looking assessments. These are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking assessments are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially. No member of the LSE Group nor their licensors assume any duty to and do not undertake to update forward-looking assessments.
No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group data requires a licence from FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB and/or their respective licensors.