A Publication of WTVP

Whether you are engaged in index investing or using them as benchmarks to track risk and performance, indexes have something to offer every investor.

Thoughtful investors can gain significant insight on the market’s behavior by studying index values and understanding what the numerical changes in indexes might represent. To help give you the context for judging index performance, it helps to first know what goes into the numbers reported by common market indicators.

What Is An Index, Really?
An index is a select group of investments whose collective performance can be taken to represent a market as a whole, or at least a clearly-defined subset of that market. While some indexes may be recalculated once a day or less, indexes representing large, liquid and active markets (such as the U.S. stock market) are typically recalculated continuously during trading periods to reflect up-to-the-moment pricing data and to indicate the direction and magnitude of the market’s price sentiments.

Of course, major U.S. equity indexes are not simply the sums of the individual prices for the investments they represent. Rather, indexes such as the S&P 500 and Dow Jones Industrial Average are statistical models of the universes they were created to mirror. They take the latest prices and adjust them to better reflect long-term changes in financial markets, the constituent companies and the economy.

The numerical values of common indexes do not directly convey either the actual daily prices or percentage changes of their constituents, and when viewed as isolated points of data, major indexes typically provide little or no actionable significance. Rather, index values are intended to be viewed in a series so they can provide timelines that can chart relative performance from a consistent foundation. An index value today can be compared with its value days, years or even decades in the past to give a meaningful estimate of how the market might have changed over that time.

The components for each index are chosen according to the stated rules and policies of that index. Moreover, each index’s value is calculated using its own proprietary formula. As a result, even though two or more indexes may include the same company in their statistics, any particular market price change for that company is likely to have different effects on each index.

Distinguishing Among Indexes
The most commonly cited stock indexes in the United States—benchmarks such as the S&P 500, the Dow, Morgan Stanley Capital International’s EAFE and Russell Investment’s Russell 2000—are actually parts of large index families. Some indexes in those families focus on specific areas of the market, such as large, midsized or small companies. Others specialize in sectors or investing styles such as growth and value. Each index has its own unique philosophy and methodology to consider. Here are overviews of some of the key factors you can use to compare them:

A Brief Guide to Benchmarks Around The World
The following is a list of many of the investment world’s most prominent and widely followed benchmarks. (Keep in mind that this is only a sampling; index compilers typically create broad families of benchmarks based on their overall indexing philosophies and practices.)

Investment indexes are complex devices that can be invaluable tools when used properly, and hazardous when used inappropriately. And while you cannot invest directly in any index, you can find investments that mirror the performance of a specified index. Many investors find these investments ideal for certain purposes. Contact your financial advisor for a better understanding of indexes or to find suitable index-based investments appropriate to your particular needs. iBi

Cathy S Butler, CFP, CRPC is a financial advisor at The Butler/Luthy Group of Morgan Stanley, located at 401 Main Street, Suite 1000 in Peoria. She can be reached at (309) 671-2873. To learn more, visit