Market indices help create benchmarks

The first stock exchange was created over 100 years ago by Charles Dow and contained 12 companies in the United States.  Today, there are numerous indices with different structures.

An index is a select number of stocks listed on an exchange.  These selected stocks are typically designed to provide an approximation of the performance of the broad index.   This means that each index is typically within one country, or one geographic area.  Some countries have numerous indices.

The key for most investors is to determine which index is the closest benchmark to gauge their overall stock market performance.  Indices provide us a system of measuring change that can be documented and reported in the newspaper, radio, internet, and television.  Investors should be using this information to make investment decisions, and to monitor their own portfolio.

One of the first documents we create for a client is called an Investment Policy Statement (IPS).  This document covers various important components to how your money will be managed.  One of the paragraphs in this document outlines the most relevant benchmarks to compare your returns against.   An example of the wording may be as follows:  For your portfolio, performance comparison should be within the context of the S&P/TSX Composite Index, S&P 500, and the Scotia Capital Markets Bond Universe Index.

If you hold common shares and country specific ETFs (exchange traded funds) then your financial advisor can likely review your holdings with you and outline what benchmarks are most suitable for each part of your portfolio.  If you hold mutual funds or structured products, this exercise may not be as easy.

To assist you in obtaining a better understanding of the various “equity” benchmarks, we have included a few points below sorted geographically.    

USA and CANADA

If you have equities within your portfolio, then chances are one, or more, of the four indices below could be a benchmark you could look at periodically. 

  • Dow Jones Industrial Average (US): Consists of 30 of the largest and most widely held public companies in the United States.
  • S&P 500 Index (US): S&P stands for Standard & Poors, and this Index consists of 500 large companies, most of which are American.
  • NASDAQ Composite Index (US):  NASDAQ stands for National Association of Securities Dealers Automated Quotation System, and this Index consists of approximately 3,015 companies.
  • S&P/TSX Composite Index (Canada):  TSX (formerly TSE), stands for Toronto Stock Exchange, and this Index consists of approximately 234 large companies as measured by market capitalization.

If you have expanded your portfolio beyond Canada and the United States then we have summarized a few points of other major indices around the world below.

AMERICAS

  • Mexico – IPC Index is a market capitalization weighted index containing between 20 to 25 companies.
  • Brazil – Bovespa Index is one of the fastest growing indices in the world.  This Index has a broad range of companies.

EUROPE

  • Eurozone – Euro Stoxx 50 is a European Index for the Eurozone, holding 50 larger stocks from 12 countries within the region.
  • United Kingdom – FTSE 100 Index is a market capitalization weighted index representing the performance of the 100 largest UK-domiciled companies.  FTSE stands for Financial Times and the London Stock Exchange.
  • France – CAC 40 Index consists of 40 large French companies as listed on Euronext Paris.
  • Germany – DAX Index consists of the 30 large German companies trading on the Frankfurt Stock Exchange.
  • Spain – IBEX 35 Index is comprised of 35 large Spanish companies traded on the Madrid Stock Exchange.
  • Italy –  FTSE MIB Index consists of 40 large Italian companies traded on Borsa Italiana’s (BIt) MTA market.
  • Netherlands – AEX Index is composed of Dutch companies that trade on Euronext Amsterdam and is comprised of a maximum of 25 of the most actively traded securities on the exchange.
  • Sweden – OMX Stockholm 30 Index is a market value weighted index that consists of the 30 most-traded stock classes.
  • Switzerland – SWISS Market Index is made up of 20 of the largest and most liquid large- and mid-cap stocks.

ASIA and PACIFIC

  • Japan – Nikkei 225 is a stock market index for the Tokyo Stock Exchange (TSE). The Nikkei 225 is the most watched index of Asian stocks.
  • Hong Kong – Hang Seng Index is a free float-adjusted market capitalization weighted stock market index in Hong Kong consisting of 45 companies broken down by four main sectors.
  • Australia – S&P/ASX 200 Index (Australia) is a market capitalization weighted and float-adjusted stock market index of 200 stocks listed on the Australian Securities Exchange.

More detailed information regarding these indices may be obtained on various websites or financial publications.  Your financial advisors should also be able to give you a report summarizing the returns for the above indices.