What is an Equity Index?
- Instrument used to track a basket of securities covering the overall market or a specific industry
- Popular broad equity-based indexes: S&P500, Dow Jones Industrial Average, Nasdaq Composite
What is an index?
An index is used to measure the performance of a basket of securities, mimicking the performance of an entire market or a specific industry. For example, the Standards and Poors 500 (S&P500) index is used to measure the performance of the US equities market as it encompasses all the largest capitalization assets trading on the US market. Indexes are used as a benchmark for investors to track how their portfolio performs in comparison to the overall market.
A popular investment strategy called “indexing” involves an investor replicating an index (like the S&P) so that they don’t have to constantly monitor their investments and try to outperform the market. An investor may also replicate the performance of the overall bond market by investing in bonds similar to those in the Bloomberg Barclays US Aggregate Bond Index. Through indexing, portfolio management is minimal but returns are also smaller over the short term.