The European Union, with its €17 trillion GDP and more than 448 million inhabitants, is the world’s third-largest economy. It’s home to globally recognized companies and a vast, integrated capital market. Yet despite this scale and potential, the long-term performance of traditional European equity benchmarks has been underwhelming.

Over the past decade, the region’s large cap benchmarks have trailed the MSCI All-Country World Index by nearly 4% per year—and U.S. equities by more than 6% annually. The picture isn’t much brighter for small caps, where benchmarks have lagged global and U.S. small cap indexes by roughly 2% to 2.5% annually.

The Problem with Size-Based Indexing

What do these benchmarks have in common? They rely solely on company size (market capitalization) to determine index membership. While this approach offers basic exposure to large or small cap segments, it overlooks a critical driver of long-term returns: company quality.

MarketGrader’s Alternative: Quality-First Index Construction

Here’s how it works:

• Universe Mapping: We start with over 5,500 publicly listed companies across 31 European countries.
  
• Segmentation: We divide the universe into large caps (top 85% by market cap) and small caps (bottom 15%).
  
• Eligibility Filters: We apply liquidity screens and exclude companies with a MarketGrader grade below 50 (out of 100).
  
• Final Selection: Using our Earnings Yield-adjusted score (combining valuation with our core fundamentals-driven grade), we select:
  
  • The top 100 large cap companies → MarketGrader Europe Large Cap 100 Index
    
  • The top 200 small cap companies → MarketGrader Europe 200 Index
    

This selection process is repeated twice a year, in March and September, ensuring consistency and adaptability across market cycles.MarketGrader takes a different approach. Rather than simply ranking companies by size, we apply our proprietary GARP + Quality methodology to identify the most fundamentally sound businesses in Europe—those with consistent profitability, disciplined capital allocation, and long-term growth potential.

The Result: Exposure With an Edge

By filtering 5,500 European stocks down to the region’s best 300 companies, MarketGrader delivers smart, efficient exposure to both large and small caps—without sacrificing quality. The outcome?

• Europe Large Cap 100 Index: Outperformed traditional large cap benchmarks by nearly 2.5% annually (add disclaimer)
  

Europe 200 Index (Small Cap): Delivered more than 6.5% annual outperformance (add disclaimer)

Conclusion

In a region where market cap-weighted indexes have fallen short, MarketGrader’s fundamentals-first approach offers a smarter path to capturing Europe’s true equity potential.