Measuring Investment Performance: Understanding Market Indices

Larry Beebe, CPA

New trustees for multiemployer benefit plans can be overwhelmed by the investment knowledge that must be quickly acquired to function effectively in their new roles.  This series provides in-depth information about plan investments to assist new trustees in their fiduciary duty of managing plan assets.stock-market-index

Understanding market indices is essential for properly evaluating your plan’s investments and investment strategy. There are a number of indices you can reference, and understanding their underlying frameworks will help you select the correct index for benchmarking investment performance.

An index is a collection of securities (tradable assets) grouped together by a common characteristic (such as size of security or location of security – i.e. , developing markets) and measured for risk and return. Some of the more common indices, with which you may be familiar, are the National Association of Securities Dealers Automated Quotations System (NASDAQ), Dow Jones Industrial Average (DOW), and Standard & Poor’s 500 (S&P 500). However, these indices are just a few of the variety of choices.

An index is often used to measure performance by benchmarking investments’ rate of return. When selecting an index against which to measure performance, it is important to find the index with a pool of underlying securities that most closely matches the underlying investments.

Before we take an in-depth look at a few of the more common indices, let’s define some helpful terms:

Large Cap/Mid Cap/Small Cap: These terms refer to the size of the companies measured in an index, and while the thresholds change over time, here are the basic guidelines:

Large Capital: Many indices measure what is termed large capital companies. This refers to companies that have a market capitalization value (the total value of the issued shares of a company) of over $10 billion. You’ll often see the shortened term “large cap.”

Middle Capital: These are companies with market capitalization between $2 and $10 billion. More commonly referred to as “mid cap.”

Small Capital: While the definition may vary among brokerages, this generally refers to a company with a market capitalization between $300 million and $2 billion. As with the other two terms, it is most often shortened to “small cap.”

Some indices only measure companies of a certain size. For example, the Russell 1000 only measures large cap companies.

Price-to-Book Ratio: This ratio, also known as the price-equity ratio, compares a stock’s market value to its book value. This is often used to gauge a stock’s relative value. A company trading at a low book price is often thought to be undervalued, but the low price could be an indicator of an issue with the company.

Weighting: Most indices are market-cap weight, so the stocks with the largest value have a larger influence on the index. Some, such as the Dow Jones, are price weighted, where each stock influences the index in proportion to its price per share.

Here is an overview of a few of the more common indices you can use when benchmarking your investments’ performance:

Name Market Description Top Holdings*
NASDAQ Composite Equity Broad index with over 3,000 underlying securities.  It measures domestic and international based common
type stocks and other similar securities that are listed on the NASDAQ Stock Market.
  • Apple Inc.
  • Microsoft Corp.
  • Google Inc.
  • Amazon.com Inc.
  • Cisco Systems, Inc.
Dow Jones Industrial Average (Dow 30) Equity Price weighted index representing the stock of
30 large U.S. companies demonstrating sustained growth and spanning all industries except transportation and utilities.
  • Visa, Inc.
  • Int’l Business Machines Corp.
  • Goldman Sachs Group Inc.
  • 3M Co
  • Chevron Corp.
S&P 500 Equity Represents 500 large companies in leading industries of the U.S. economy, providing coverage of approx. 80% of U.S. equities. This index is often considered the best representation of the stock market and a bellwether for the economy.
  • Apple Inc.
  • Exxon Mobile Corp.
  • Microsoft Corporation
  • Johnson & Johnson
  • General Electric Co.
Russell 1000 Growth Equity Measures the performance of large capital U.S.
companies included in the Russell 1000 Index
with higher price-to-book ratios and forecasted
growth values.
  • Apple Inc.
  • Microsoft Corp.
  • Google Inc.
  • Int’l Business Machines Corp.
  • Coca Cola Co.
Russell 1000 Value Equity Measures the performance of large capital U.S.
companies included in the Russell 1000 Index
with lower price-to-book ratios and expected
growth values.
  • Exxon Mobile Corp.
  • General Electric Co.
  • Chevron Corp.
  • Johnson & Johnson
  • Procter & Gamble Co.
MSCI World Value Index Equity Represents 850 large and middle capital securities across 24 developed markets countries. It includes 1,606 world stocks and is commonly used to benchmark global stock funds.
  • Apple Inc.
  • Exxon Mobile Corp.
  • Google Inc.
  • Microsoft Corp.
  • General Electric Co.
MSCI EAFE Index Equity Represents 909 large and middle capital securities across developed markets countries outside of the US and Canada. This index measures the equity market performance of developed markets (with the exclusion of Canada and the US).
  • HSBC Holdings
  • Vodafone Group
  • BP
  • Total S.A.
  • Royal Dutch Shell
Barclays U.S. Aggregate Bond Index Fixed Income The broadest measure of the taxable US bond market, this index measures investment grade, U.S. dollar-denominated, fixed-rate taxable bonds including Treasury, agency, corporate, mortgage-backed, asset-backed, and international dollar-denominated issues. All bonds measured have maturities of a year or more. n/a
Barclays U.S. TIPS Index Fixed Income Measures investment grade, inflation-protected
securities issued by the U.S. Treasury with at least one year until maturity
n/a
FTSE NAREIT All Equity REITs Index Real Estate Measures 143 publicly-traded real estate companies and tax-qualified U.S. Real Estate Investment Trusts with more than 50% total assets in qualifying real estate assets other than mortgages secured by real property.
  • Simon Property Group
  • American Tower Corp.
  • Public Storage
  • Equity Residential
  • ProLogis

By understanding market indices and choosing an appropriate index, you can identify those investment options that are performing below the market, allowing you to monitor them over time and benchmark your plan’s financial health. If plan investments are consistently under-performing, you should consult with your investment advisor about alternative options.

*At time of publication

For more investment information, view other posts in this series:

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