Learn more about the differences in benchmark indices to best track your investment performance.
- When choosing an index as a benchmark for evaluating your security’s performance, remember to select one that represents your type of investment.
- Some indices are broad-based and others are specific to one sector or type of investment.
- The historical data and performance trend information that these indices provide can help you see where your security fits into the big picture.
There are numerous market indices in the market place, some of which are broad-based and others that are specific to one asset class, such as International. Other indices may focus on sectors— like utilities or healthcare— while some may focus on the type of investment, such as Master Limited Partnerships. It is important to select the right index to use as a benchmark—that is, one that reflects the types of investments that you own. You want to compare apples to apples so your results do not appear to over or under achieve.
The Dow Jones Industrial Average (DJIA)
The granddaddy of all benchmarks is the Dow Jones Industrial Average. Established in 1896, it is the oldest and the most frequently quoted index in the world. The DJIA is an average of 30 widely-traded blue chip stocks that provide a good cross-section of market segments. It is dollar weighted, which means that stocks with higher prices influence the index more. Since this index measures price movement only, it is a good indicator of where the market stands on a given day.
The Standard & Poor’s 500 (S&P 500)
Another widely known index is the S&P 500, which is an equity benchmark. As the name implies, 500 securities are held in this index, all of which are traded on the New York Stock Exchange (NYSE), or the NASDAQ exchange. The 500 companies included in the index are those that are perceived to be industry leaders rather than the largest on the exchange. Given its size, the S&P 500 is considered to be a well-diversified index and is gaining popularity over the Dow Jones Industrial Average
Additional market indices
Other market indices are commonly used as benchmarks in the industry as well. Following is information on some of the most recognized, although there are many more.
FTSE Russell: FTSE Russell has thousands of indices in over 80 countries, but the most commonly used are the family of about 20 domestic equity indices. These are market-cap weighted and include only common stocks based in the U.S. All indexes are subsets of the Russell 3000 Index, which measures the performance of the 3,000 largest U.S. companies based on total market cap. The Russell 3000 Index represents 98% of the investable U.S. equity market.
Lipper: These indices track the mutual fund environment and cover multiple asset classes. . Lipper is considered by many to be the leading provider of U.S. mutual and global fund data. Historical performance data goes back to 1959 and includes open-ended mutual funds, closed-ended funds, and variable annuities.
Barclays Capital Fixed Income: Many indices in this group were formerly Lehman Brothers indices and were rebranded under the Barclays Capital Indices name in November 2008. The Lehman Brothers family of performance indices was developed in 1975 to span the global fixed income markets. Today, indices are added to the Barclays Capital lineup in response to investors’ needs and changes in the marketplace and include other areas other than fixed income.
Bank of America Merrill Lynch: Bank of America Merrill Lynch has an extensive family of global fixed income indices. From investment-grade to high-yield issuers domiciled in developed to emerging market countries, the firm offers thousands of aggregate and sub-market indices including the Global Government Series, Regional Broad Market Series, Global High Yield Series, Global Emerging Markets Series, and the LIBOR and Spot Currency Series.
Europe/Australia/Far East Index (EAFE): This index is calculated by Morgan Stanley Capital International (MSCI) and is considered to be the best benchmark for international investments. International covers the developed world excluding the USA and Canada. This index measures the performance of over 900 securities that are listed on the stock exchanges of several countries including Japan, the United Kingdom, France, Switzerland, and Germany, among other areas.
While this is not a complete list of all the market indices, it is a good start toward understanding those most commonly used by investors. However you choose to “bench” your security or account, remember to select an index that represents your type of investment, whether it’s a blue-chip stock or an international mutual fund holding. The historical performance and trend information that these indices provide can help you see how your security or portfolio stacks up against similar investments.
This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, investment, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought. Past performance shown is not an indication of future results and investment returns and principal value will fluctuate. All investments involve risks, including possible loss of principal. There is no assurance that any investment strategy will be successful. Diversification does not ensure a profit or guarantee against a loss.Contact an Expert