There are a myriad market indices in the industry, some of which are broad-based and others that are specific to one industry or type of investment (such as international investing). 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 underachieve.
The granddaddy of all benchmarks is the Dow Jones Industrial AverageTM. Established in 1896, it is the oldest and the most frequently quoted index in the world. The Dow Jones 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 second most widely known index is the Standard & Poor's 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), the American Stock Exchange (AMEX), 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.
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.
Russell - Russell has over 200 indices, but the most commonly used are the family of 20 U.S. 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 - This index tracks the mutual fund environment and covers both the equity and fixed income worlds. 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 annuity (unit-linked) funds.
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 of indices in response to investors' needs and changes in the marketplace.
Merrill Lynch - An industry leader and recognized name, 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, Merrill Lynch offers over 2,000 aggregate and sub-market indices within the following: 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 and is considered to be the best benchmark for international investments. International covers the world excluding the USA; global includes the USA. This index measures the performance of over 900 securities that are listed on the stock exchanges of the following countries: Australia, Austria, Belgium, Denmark, the Netherlands, New Zealand, Norway, Singapore/Malaysia, Spain, Sweden, Switzerland, United Kingdom.
While this is not a complete list of all of the market indices, it is a good start toward understanding those most commonly used by investors. When choosing an index as a benchmark for evaluating your stock's performance, remember to select one that represents your type of investment, whether it's a blue-chip stock or an international mutual fund holding. The historical data and performance trend information that these indices provide can help you see where your stock fits into the big picture.
Standard & Poor's 500 is a registered trademark of Standard & Poor's Corporation, a division of The McGraw-Hill Companies, Inc.
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, 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.