As our introduction to the Dow Jones Industrial Average showed, it contains just 30 stocks - hardly a sufficient sampling of the thousands of stocks that trade each business day. For this reason, we thought we'd share our five must know stock indexes. Each of these are considered broad market indices that measure stock performance based on size and location, not by specific industry.
S&P 500 - Domestic Large Caps
The Standard & Poor's 500 Index is widely regarded as the top index for measuring large cap stocks in the United States. Rather than taking the largest 500 companies based on market capitalization, the S&P 500 has a selection committee that regularly evaluates the composition of the index to ensure it remains a proper representation of large U.S. stocks. To learn more about the index including composition, methodology, performance, and research, click here to go to the S&P 500 Index page at StandardandPoors.com.
S&P 400 - Domestic Mid Caps
The line between large, mid, and small varies in the industry, but the Standard & Poor's 400 Index is our favorite measure of mid cap stocks. Just like its larger counterpart described above, the S&P 400 Index is also picked based on the decisions of an index selection committee. It represents approximately 7% of the total capitalization of the U.S. stock market and was started in 1991. To learn more about the index including composition, methodology, performance, and research, click here to go to the S&P 400 Index page at StandardandPoors.com.
Russell 2000 - Domestic Small Caps
Unlike the S&P 500 and S&P 400 indices, the Russell 2000 does not rely on a selection committee of any sort. Instead, the Russell 2000 Index measures the performance of 2000 of the smallest stocks inside of the larger Russell 3000 Index. A good way to think about this is that the Russell 3000 represents the 3000 largest U.S. stocks while the Russell 2000 is the bottom 2000 on that list. The index is reconstituted (reset) each year to ensure that small companies that become big are left out of the index the following year and large companies that become smaller are added to the index. To learn more about the index including composition, methodology, performance, and research, click here to go to the Russell 2000 Index page at Russell.com.
MSCI EAFE - Foreign Large Cap
This index measures the performance of foreign large cap stocks in 21 developed countries. The 'EAFE' in the name stands for 'Europe, Australasia, and the Far East' and it has been the gold standard for benchmarking foreign stocks for many years. Unfortunately, the MSCI website is a bit more difficult to navigate, so we've listed their official definition of the index below:
The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. As of June 2007 the MSCI EAFE Index consisted of the following 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.
Though their selection process is a little more difficult to define, the bottom line is that this index is a healthy measure of how foreign stocks perform in developed markets. To learn more about the index, click here to go to MSCI's website.
MSCI EM - Foreign Emerging Markets
After covering the rest of the market, the last segment we have remaining is emerging markets. These are stocks that trade on foreign exchanges of developing countries like Brazil, China, or India. While these countries are growing at a fast pace, their relative size is still small compared to many developed markets included in the MSCI EAFE Index. Again, referring to MSCI's website, we have the following definition of the MSCI Emerging Markets Index:
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. As of June 2009 the MSCI Emerging Markets Index consisted of the following 22 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.
As you can see, the all of the major players in the developing world are included in this index. To learn more about the index, click here to go to MSCI's website.
The chart above is provided by Yahoo! Finance and shows the five indices discussed in this post. If you click to expand, you will find that emerging markets have soundly beaten each of the other indexes over the last five years.
Recent Comments