Why there's something gnawing at the new AEX

• From Monday, September 22, the Amsterdam main index will no longer include 25 but 30 listed companies.
• A larger AEX should contribute to the international image of the Amsterdam stock exchange and attract passive capital.
• However, the AEX remains small in international terms, with only 30 stocks. Index investors are looking for much broader risk diversification.

When the AEX index celebrated its fortieth anniversary in March 2023, René van Vlerken started to get a little antsy. The then-head of listings at Euronext Amsterdam, he cautiously began to consider whether it was time to expand the benchmark. At the Christmas party earlier this year, the idea was publicly floated for the first time. An online consultation followed.

Two and a half years after the initial inspiration, the time has come. The expansion of the AEX from 25 to 30 stocks starting Monday is the first imprint Van Vlerken, now CEO of the Amsterdam Stock Exchange, has made on the Dutch main index. A larger AEX is more diverse in terms of names and sectors, has a more international feel, and should attract more passive capital.

Private equity firm CVC, coffee company JDE Peet's, meal delivery company Just Eat Takeaway, real estate fund WDP, and parcel delivery company InPost are the lucky companies that can call themselves the main fund and add several billion euros in market value to the benchmark.

The selection of JDE Peet's and Just Eat Takeaway is particularly noteworthy. Both companies received bids. In the case of the meal delivery company, it's highly likely its shares will remain on the AEX for less than two weeks. The only reason it was considered for the promotion was the takeover bid. The share price logically rose when the bid was announced.

When announcing the names, Van Vlerken indicated that the stock exchange will only remove a share from an index if a takeover is irreversible.

With this attitude, the exchange is showing its most bureaucratic side. The purpose of the expansion is, after all, to showcase the diversity of the Amsterdam stock market, not to be a billboard for acquisitions by competitors or investment funds.

Yet, there's little criticism of Euronext's handling of takeover candidates. Rules are rules, writes the investment platform StockWatch, for example. Or, as Joost Schmets of the VEB investment association puts it: "Should Euronext have a vision for the chances of a bid succeeding? I don't think so."

It's not surprising that Van Vlerken felt it was time to upgrade the main index. The last time the AEX was updated was in 1989, when it expanded to its current 25 stocks. That was already a substantial expansion compared to its early days. The AEX's predecessor, the EOE index, began in 1983 with thirteen stocks.

Among the forerunners were names that can still be found in Amsterdam's main benchmark, such as AkzoNobel, Unilever, and Heineken. But also a few names that have long since departed the Damrak, such as Nedlloyd and Hoogovens.

In its early years, the index primarily reflected large Dutch companies and thus served as a barometer for the Dutch economy. In 1994, it was renamed the AEX.

In recent years, the smell of Brussels sprouts has dissipated at Beursplein 5. The benchmark has become increasingly international. In the late 1990s, the Indian steel company Ispat, now ArcelorMittal, was listed in Amsterdam. In recent years, more and more names have been added, including the American music company UMG and the Italian investment company Exor, although these two are legally incorporated in the Netherlands.

In addition, a number of "quintessentially Dutch" companies left the Netherlands. Relx (Reed Elsevier), Shell, DSM, Unilever, and Aegon relocated their headquarters elsewhere, but retained their listings at Beursplein 5.

For Euronext, the expansion is an attempt to make the AEX even more global. The Dutch economy is becoming more international and the stock market more diverse, CEO Van Vlerken stated. "The index must be a good reflection of that," he told the FD earlier this year.

An expansion should restore the balance, he explained to the FD in March. Before the expansion, the five largest companies—ASML, Unilever, Shell, Prosus, and Relx—determined roughly 60% of the index's weighting. The addition of the five new stocks will hardly change that.

Since 2002, the five largest shares in the AEX have accounted for an average of 56% of the index, although the composition of that top 5 has of course changed over the years.

The promotion of five stocks to the AEX also brings five new names to the Midkap index. The small-cap index, the division below the Midkap, is being transformed into the Amsterdam Next 20. The stock exchange now refers to these (very) small market capitalization companies as "the future AEX stocks." The Next 20 is thus being positioned as a breeding ground for the main index. In the past, for example, the current main funds ASM International and Besi started out as small-cap companies.

The Midkap continues to represent the middle group. But since the AEX remains small compared to other national indices in Europe, the question arises: wouldn't it have made more sense to expand the AEX to include more stocks, say 40, and abolish the Midkap?

Midkap shares are traded much less than the main index. Over the past ten years, in particular, the Midkap has been less active than the AEX in terms of trading turnover (the number of shares traded multiplied by the market price). While it has improved slightly since last year, investors still trade 12.5 times as much in AEX shares as in Midkap shares.

However, expanding to 35 or 40 shares wasn't an option, Van Vlerken explained earlier this month at a press conference. This is due to the liquidity of the smaller shares.

A key reason for the AEX's expansion is to attract passive capital. Investing in so-called index trackers, which precisely track a benchmark and are tradable on the stock exchange, has grown enormously in popularity over the past two decades.

And Euronext Amsterdam doesn't think that trend is abating. The hope is that with a broader index composition, more tracker providers will follow the AEX. Moreover, if the index attracts more passive capital, that will benefit the companies listed on it.

But providers of these types of index trackers have to add or sell shares every quarter, when Euronext rebalances the index. This is difficult when trading in some stocks is too thin. Van Vlerken indicates that Euronext has extensively tested and discussed an even larger expansion with iShares and Van Eck, the companies currently offering an AEX ETF. "And with 35 or 40 funds in the index, things were getting a bit tense in terms of liquidity."

With thirty stocks, the AEX is still relatively small in European terms. The DAX in Frankfurt and the CAC 40 in Paris have ten more listings. London's main index, the FTSE, offers listings for one hundred companies.

Moreover, national indices are declining in importance in Europe. Passive investors, in particular, prefer much broader diversification and follow a very broad global index or the S&P 500. In Europe, the broad Stoxx 600 or MSCI Europe are preferred.

Whether the AEX expansion will actually yield any results remains to be seen. However, Schmets of the VEB believes the exercise has not been in vain. "The benefits and necessity remain to be seen, but it has certainly generated a lot of publicity for Euronext as a company that wants to keep the Dutch stock market vibrant."