A guide to tracking indices: which ones should you consider?
Determine which index best suits your investment goal
Indices track the performance of a group of securities or assets to represent the overall performance of a particular sector
Popular indices include the S&P 500, Dow Jones Industrial Average, NASDAQ Composite, FTSE 100, and Nikkei 225
Investors use indices as benchmarks to assess investment performance and as underlying assets for financial instruments like ETFs, index futures and options
What are indices?
An index is a method that tracks the performance in a specific group of securities or assets that are used to represent the overall performance of a particular market or sector, generally by capitalization.
Indices are often created by pooling a basket of stocks, bonds, or other securities and measuring their changes over time.
The most widely followed indices include the S&P 500, Dow Jones Industrial Average, and the NASDAQ Composite in the United States, and the FTSE 100 in the UK. Each index typically has its methodology and criteria for selecting the assets that make up the index.
Investors use indices as benchmarks to assess investment performance, to compare the effectiveness of various investment strategies, and as underlying assets for financial instruments such as ETFs and index futures and options.
The S&P 500 (SPX/US500)
The S&P 500 for example represents around 80% of the total value of the stock market its typically referred to as a market weighted index. if the total market value of all 500 companies in the S&P 500 drops by 10%, the value of the index also drops by 10%.
The S&P 500 index covers 11 sectors: Communication Services, Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Information Technology, Materials, Real Estate, and Utilities. Each sector is made up of a group of companies that are classified as operating in that particular sector based on their primary business activities.
How are sectors measured?
Each sector has a corresponding index, and the performance of the sector is measured by tracking the performance of the companies within that sector. The index for each sector is calculated by taking a weighted average of the individual companies' market capitalization, with the weight of each company determined by its market value. The weightings are adjusted periodically to reflect changes in market capitalization or other factors that may affect a company's position within its sector.
Dow Jones (DJIA/US30)
Is the oldest index carrying 30 of the largest and most prominent influential companies in the US which represents a quarter of the value of the entire US stock market.
Its also known to be a representation of the best blue-chip companies that pay dividends. The Dow Jones companies are selected by the editors of The Wall Street Journal. Unlike the S&P 500, which includes a broader range of companies, the Dow Jones focuses only on 30 "blue-chip" stocks.
It covers various sectors including Industrials, Technology, Health care, Financials, Consumer services, Consumer goods, Energy, Basic materials, Utilities.
Big cap companies such as Boeing, Apple, Johnson & Johnson, JPMorgan Chase, McDonald's, Procter & Gamble, ExxonMobil are on top of the list.
This is index is often used as a benchmark of growth stocks mainly technology stocks, but it also lists companies from other industries such as healthcare, consumer goods, finance, and others it is one of the most widely followed stock market indexes in the world. And includes companies not based in the US.
Mega tech companies include Apple, Amazon, Microsoft, Google parent Alphabet and Facebook. There also biotech giants such as Moderna, BioNTech and vertex.
The FTSE 100 is an index that tracks the performance of the 100 largest companies listed on the London Stock Exchange (LSE) based on their market capitalization. The index is managed by the company Financial Times Stock Exchange (FTSE).
The UK index includes companies from various sectors such as banking, mining, healthcare, retail, and energy. It serves as a widely recognized benchmark for the UK stock market and is one of the most monitored indices worldwide.
Big cap companies on the FTSE include, AstraZeneca, British American Tobacco, Diageo, GlaxoSmithKline, Unilever, HSBC, BHP Group.
Nikkei 225 (N225/JP225)
Listed on the Tokyo stock exchange, the Nikkei 225 tracks the performance of large, publicly owned companies in Japan.
The index includes companies from a wide range of sectors, including manufacturing, finance, technology, and retail, among others. The Nikkei is one of the most widely recognized stock market indices in Asia and is often used as a benchmark for the Japanese stock market as a whole.
Popular companies listed on it are Toyota Motor Corp, Sony, Mitsubishi UFJ Financial Group, Nintendo Co., Panasonic Corp.
How to track Indices?
Tracking indices means tracking the performance of a particular market or sector, as represented by an index. This involves regularly monitoring and analyzing the movements of the index to gain insights into the overall performance of the market or sector.
ETF’s can also be used to track the performance of an index. Other ways include following reports on the direction of these indices. By tracking the movements of an index, investors can gain insight into the performance of the market or sector the index represents and make informed decisions about their investments.
Mutual funds and exchange-traded funds (ETFs) frequently use indexes as benchmarks to gauge their performance. For example, many mutual funds compare their returns to the returns of the S&P 500 Index to provide investors with an idea of how much more or less they are earning on their investments compared to an index fund.
“An index is like a home to many large companies or sector benchmarks”