How to Invest in French Stocks

Mentions of France commonly conjure up images of croissants, baguettes, wine, and the Eiffel tower. Some investors, however, see France and its CAC 40 benchmark index as an investment opportunity.

What is the CAC 40?

The CAC 40 is the most important of the French Cotation Assistée en Continu (CAC) indexes. It is considered the central benchmark of France’s economy. The 40 stocks tracked by the index are traded on the Euronext Paris stock exchange. Index components are weighted based on both their market capitalization and the market value of their free float. A single stock cannot make up more than 15 percent of the index. The makeup of the index is reviewed on a quarterly basis.

Table 1: The 10 stocks with the heaviest weighting in the CAC 40

Source: Euronext. Date: Information applicable from September 30, 2023. Recorded by moneyland.ch on December 14, 2023.

The CAC 40 is a price index, like the Swiss Market Index (SMI). Unlike performance indices, dividends paid out by the underlying companies are not accounted for in price indices. However, there are two sub-indices of the CAC 40 that are performance indices. These are the CAC 40 Gross Total Return, which accounts for gross dividends, and the CAC 40 Net Total Return, which accounts for net dividends.

How accurately does the CAC 40 reflect the French economy?

The CAC 40 is considered France’s benchmark stock market index. It represents the performance of the country’s 40 leading exchange-traded companies. As a barometer of the French stock market, it is an indicator of the state of France’s economy and of general business trends.

With 40 different stocks, the CAC 40 is numerically more broadly diversified than the SMI (20 stocks). But compared to the Nikkei 225 (225 stocks) and the Nasdaq 100 (100 stocks), it is less diversified in terms of the number of companies it tracks. Additionally, its development is heavily dependent on the biggest companies it tracks: The ten most heavily weighted stocks together make up nearly 60 percent of the index.

The CAC All-Tradable index is a broader representation of the French economy. It includes all of the stocks listed on the Paris stocks exchange that fulfill certain criteria. It includes more than 200 stocks in total, including all of those tracked by the CAC 40 index.

How can I invest in the CAC 40?

There are a number of different ways to invest in the CAC 40:

• Buy shares in the individual stocks tracked by the CAC 40.
• Buy shares in an ETF based on the CAC 40.
• Buy shares in actively managed mutual funds that invest in CAC 40 companies.
• Get a tracker certificate based on the CAC 40.
• Use a fund savings plan that invests in CAC 40 funds.
• Use a conventional or online asset management service that invests in the CAC 40.

Which ETFs can I use to invest in the CAC 40?

If you are looking for a simple and relatively cheap way to invest, then an exchange-traded fund (ETF) could be an adequate solution. These passively managed funds are traded on the stock exchange. They replicate the whole index by investing in the underlying stocks.

All you need in order to invest in ETFs is a stock brokerage account. Many Swiss banks offer these accounts, but banks that specialize in online trading are normally cheaper. The online trading comparison on moneyland.ch can help you find a suitable account.

You can also invest in ETFs using an account from Yuh or Neon. These neobanks only offer a limited selection of ETFs, so you may not find all of the ETFs listed in Table 2.

Table 2: ETFs that track the CAC 40, sorted by total expense ratio (TER)

Date: December 18, 2023.

All of the ETFs in Table 2 use physical replication to replicate the CAC 40. That means they actually invest in the stocks tracked by the index. Synthetic funds, on the other hand, normally replicate indices using swaps. ETFs that use physical replication are considered more secure, and are easier for inexperienced investors to understand.

What are the costs of using an ETF to invest?

ETFs are relatively simple and cheap, but there are still costs involved with using them to invest. Pay careful attention to the brokerage fees and custody fees charged by your bank to buy, hold, and sell ETF shares. These fees vary broadly between banks. There is also a federal stamp duty that is levied when you buy and sell ETF shares. This tax is the same no matter which Swiss bank you use.

The fees charged by the ETF itself collectively make up the total expense ratio (TER). Passively managed funds like ETFs normally have lower ongoing costs than actively managed mutual funds.

What are the advantages of investing in the CAC 40?

Between 2018 and 2023, the performance of the CAC 40 – converted into Swiss francs – was somewhat better than that of Switzerland’s benchmark SMI index. The CAC 40 covers a broad range of different industry sectors and includes many globally-renowned companies. The index can be interesting as a way to diversify your investment portfolio.

Table 3: Performance comparison of the CAC 40 and the SMI

Performance figures and currency exchange rates are based on the closing prices on December 14, 2018, and December 14, 2023. Sources: Investing.com (performance data), Finanzen.ch (currency exchange rates).

What are the disadvantages and risks?

Investing in the stock market always comes with a certain amount of risk. The risk is higher when you invest in just a few individual stocks. Major losses are possible over both the short-term, and in the long-term. That is why it is important to invest in many different asset classes, industry sectors, and geographic regions. The CAC 40 should only ever be used as an additional component to diversify your stock portfolio.

The CAC 40 includes many companies that are dependent on global markets. Examples include luxury goods maker LVMH and cosmetics maker L’Oréal. These stocks can potentially be more volatile because they are sensitive to global economic and political fluctuations.

Swiss investors should also pay attention to the currency exchange risk. Because the CAC 40 is denominated in euros, a weakening of the euro against the Swiss franc can reduce your real returns in francs.

Conclusion

The CAC 40 can be used as one component of a diversified stock portfolio. ETFs provide a simple and affordable way to invest in the CAC 40. However, you should understand that investing in stocks comes with a risk of loss. Avoid basing your entire investment strategy on a single stock index. Spreading your capital across many different regions and sectors and investing for long terms helps to minimize the investment risks.

More on this topic:
How to invest money in Switzerland
How to invest in the Italian stock market
How to invest in the SMI
How to invest in the DAX
How to invest in the Nikkei
How to invest in Nasdaq