An index is not an investment in and of itself. It’s a measure of performance for a certain set of securities. It’s a sampling. Index funds will invest in the same securities as the underlying benchmark index. These were the most common indexes used in 2021.
The Dow Jones Industrial Average
The Dow Jones Industrial Average is a stock index that represents the average price movement of 30 large companies across industries in the U.S. Named after Charles Dow and Edward Jones, this famous stock benchmark is also known as Dow Jones, the Dow 30, or, as it’s most often called, “the Dow.” Serious investors, such as technical and institutional traders, don’t hold the Dow Jones in awe as much as the mainstream media does. Newscasts and wide-read print media can simply provide a headline such as “The Dow Hit a New Record High Today.” Consumers will know what that means.
The S&P 500 Index
Known as “the S&P 500,” the Standard & Poor’s 500 Index is the most common benchmark for the large-cap segment of the U.S. domestic stock market. The index represents about 500 U.S.-based companies. It covers about 75% of the U.S. equity market. You might think about using one of the best S&P 500 Index funds as a core holding in a portfolio of mutual funds or ETFs.
The Nasdaq
The Nasdaq, or National Association of Securities Dealers Automated Quotations System, is a stock exchange like the better-known New York Stock Exchange (NYSE) on Wall Street. It was the first electronic stock market. It’s the successor to the over-the-counter (OTC) system of trading. The Nasdaq is one of the most-watched stock indexes, along with the Dow and the S&P 500. Its main index is the Nasdaq Composite. It consists of more than 2,500 stocks, but the best-known index may be the Nasdaq 100. Stocks traded on the Nasdaq often have ticker symbols with four characters, such as MSFT for Microsoft or TWTR for Twitter.
The Wilshire 5000 Index
Often called “the total stock market index,” the Wilshire 5000 is the broadest stock market index. It’s a sampling of more than 5,000 stocks representing a range of market capitalization, such as large cap, mid cap, and small cap. The Wilshire 5000 is market cap-weighted. This means that larger companies will represent a larger portion. They’ll be among the top holdings by percentage over the smaller companies. You may feel that you have a diversified holding because of its exposure to so many stocks of different caps. However, the high exposure to large-cap stocks is so great that the performance will be very similar to most large-cap stock funds. Many investors choose to use an S&P 500 index fund to represent large-cap stocks, with a separate index such as the Russell 2000. The separate index can represent small-cap stocks within their portfolio.
The Russell 3000 Index
Not to be confused with the Russell 2000, the Russell 3000 is a stock index representing about 3,000 stocks. It measures the performance of the largest U.S. companies. The Russell 3000 Index is often called a “broad market index.” It represents about 98% of the investable U.S. equity market. Mutual funds and ETFs that invest in a way that mimics the Russell 3000 Index can be good choices in building a portfolio. But the Russell 3000 should be the large-cap portion of the portfolio. The portfolio should still include other fund types or categories, such as small-cap stocks, foreign stocks, and fixed income (bonds).
The Russell 2000 Index
The Russell 2000 is an index that represents the small-cap stock portion of the equity investment world. It covers about 2,000 of the smallest companies based on market capitalization. Russell Investments, the creator of the Russell 2000 Index, says that it “is constructed to provide a comprehensive and unbiased small-cap barometer. It’s reconstituted annually to ensure that larger stocks do not distort the performance and characteristics of the true small-cap opportunity set.” This makes Russell 2000 Index funds and ETFs good complements to a large-cap index, such as the S&P 500, for building a portfolio of funds.
The S&P 400 Index
The S&P Midcap 400, also known as the “S&P 400,” is an index made up of U.S. stocks in the mid-cap range. The Standard & Poor’s website states that “the S&P 400™ provides investors with a benchmark for mid-sized companies . . . the S&P 400 covers almost 6% of the U.S. equities market and is part of a series of S&P DJI U.S. Indexes that can be used as building blocks for portfolio construction.” The mid-cap range is from $200 million to $5 billion in market value, according to Morningstar. This may sound like a lot, but companies are not widely known until they reach the multi-billion mark. Mid-cap stocks can include some companies you may have heard of, such as the parent company of myFICO. A large-cap company such as Walmart is much larger (over $400 billion as of January 2022).
The MSCI Indexes
MSCI is an acronym that stands for “Morgan Stanley Capital Investments.” Many MSCI indexes are widely used as benchmarks for foreign stock portfolio performance.
MSCI ACWI
ACWI is an acronym that stands for “All Country World Index.” The MSCI ACWI covers more than 3,000 securities across large-, mid-, and small-cap segments, and across style and sector segments in 50 developed and emerging markets.
MSCI EAFE
EAFE is widely accepted as the benchmark of the international market. The acronym stands for “Europe, Australasia, and the Far East.” The MSCI EAFE Index is an aggregate of 21 country indexes that represent many of the major markets of the world.
MSCI World
This index covers more than 1,600 securities from 23 developed countries all over the world. It also covers the U.S., so it’s not a true foreign stock index. It includes many U.S. domestic stocks.
MSCI Acronym Suffixes
The acronym “IL” added to the index name means that the index is listed in local currency. “DM” means “developed markets.” “EM” means “emerging markets.”
Bloomberg US Aggregate Bond Index
The Bloomberg US Aggregate Bond Index, also known as the BarCap Aggregate, is a broad bond index that covers most U.S. traded bonds and some foreign bonds traded in the U.S. The BarCap Aggregate was once known as the Lehman Brothers Aggregate Bond Index. You can capture the performance of the overall bond market by investing in a total bond market index fund.
