What is a Benchmark Index?
A benchmark index is a standard reference point that is used to compare the results of similar investments over time. Investors can use a benchmark index to analyze the earnings of an individual or institutional investment portfolio. Different indexes can be used to measure stock, bond, and commodities portfolio earnings.
A common stock index is the S&P® 500. Investors can compare the earnings of the stocks in the S&P® 500 index to the earnings of the stocks in their own portfolios. This index tracks the performance of 500 actively traded, large cap company stocks in the United States. Generally, a stock investor's goal is to have a portfolio outperform, or beat, the S&P® 500 stock index. The Russell 2000® index is another stock index which tracks 2000 small cap stocks in the United States.
The Dow Jones Industrial Average is another benchmark index that investors commonly use to measure their investment portfolio results. This tracks the earnings of 30 stocks that are widely held by both individual and institutional investors. Companies included in the Dow Jones Industrial Average are generally the biggest, most prominent companies in the United States. According to Dow Jones' website, the Dow Jones Industrial Average is the most quoted benchmark index in newspapers, on television, and on the Internet.
Bond investors also use benchmark indexes to review their results. The Lehman Brothers' Aggregate Bond Index is a popular bond benchmark index. This includes fixed-rate, investment grade bonds. Types of bonds included in the Lehman Brother's Aggregate Bond Index include treasury, government, mortgage, and corporate bonds.
Indexes are also available that focus on stocks in specific industries. These can provide insight on how an overall market sector is performing. Industries that are commonly tracked separately by various indexes include transportation, utilities, and retail.
Commodities investors also use indexes to measure their results. The S&P® GSCI index tracks 24 different raw material prices. These materials include oil, natural gas, cattle, sugar, coffee, and other heavily used raw materials.
Benchmark indexes have a long history in the United States. The S&P® 500 began in 1957. The Dow Jones Industrial Average, created in 1896, is now over 100 years old. With its 1986 debut, the Lehman Brothers Aggregate Bond Index is relatively new. While investors cannot invest directly into an index, many financial institutions have created mutual funds that mimic the indexes. For example, an investor can purchase shares in a mutual fund that contain only S&P® 500 stocks.
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