TUNE INTO THE NEWS AND YOU'LL GET updates on the weather, the latest Washington shenanigans, and the vicissitudes of the Dow Jones industrial average or the S&P 500. Originally launched as monitors for financial markets, indexes have evolved into essential tools for investors, allowing comparisons among broad asset classes, providing benchmarks against which to measure investment performance and serving as recipes for the portfolios of a vast number of indexed mutual and exchange-traded funds.
Today, there are an estimated 3 million indexes. And even among well-known and similar-sounding indexes, there are surprising differences-what constitutes a "small" company, for example, or whether Korea still qualifies as an "emerging" market. Such nuances can impact the returns of an index or the risk it reflects-important considerations if you're shopping for an index fund, evaluating a money manager or simply trying to understand a corner of the investing world.
You can get details about an index you're interested in from factsheets posted by index makers, though some providers try to keep some specifics confidential. Investors can find the name of their fund's benchmark or underlying index in the prospectus. You can't invest in an index itself, and even an index fund won't match the performance of its underlying index because of management fees and other costs. But prolonged underperformance relative to a benchmark in an active fund is a red flag, as is a passive fund's failure to track its index closely.
Here's a quick summary of some of the most common indexes. Most weight their members based on market value, calculated by multiplying the stock price by the number of outstanding shares. (Returns and other data are as of February 28.)
This story is from the May 2023 edition of Kiplinger's Personal Finance.
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This story is from the May 2023 edition of Kiplinger's Personal Finance.
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