You always hear news commentators talking about “the market.” But what you may not realize is that what they are really talking about is an index, and there are exchange traded funds (ETFs) that track them.
Investors usually use indexes to track the performance of the stock market, according to Investopedia. An index is a statistical measure of changes in a portfolio of stocks that represent an overall market, and most indexes weigh companies based on their market capitalization.
The main advantage of an index fund is their lower management fees, with expense ratios that can be as low as 0.2%. Other noteworthy attributes are their transparency and the ease at which investors may utilize the investment vehicle.
DJIA. The first index was founded by Charles Dow and it has evolved into the Dow Jones Industrial Average. It contains 30 of the most popular blue chip companies and many don’t consider it volatile or risky. The index uses a price-based weighting, unlike other indexes which use market capitalization weighting, and isn’t viewed as a benchmark that covers the entire market. [How to play the Dow.]
- DIAMONDS Trust, Series 1 (NYSEArca: DIA)
S&P 500. One of the world’s best benchmarks for large-cap stocks. It covers 70% of the U.S. stock market and is considered the best overall indicator of market performance. The only downside is that 45 companies make up 50% of the index’s value and there are few foreign components. [ETF spotlight: SPY.]
- SPDRs (NYSEArca: SPY)