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)
Nasdaq. The Nasdaq Composite is mostly weighted in tech and internet stocks, which have high growth potential. However, the companies are speculative and risky, which makes the index more volatile.
- PowerShares QQQ (NasdaqGM: QQQQ)
Wilshire 5000. The Wilshire is one of the most diversified indexes in the world. It basically covers all of the public companies in the United States. Still, the Whilshire only contains U.S. companies, and the top 10% of companies in the index make up more than 75% of the index’s value.
- SPDR DJ Wilshire Total Market (NYSEArca: TMW)
Russell 2000. The Russell is a diversified index for small-cap companies. However, the index has its ups and downs. Rallies can come and go, but when small-caps are disfavored, the index could be stagnant for a long time. [Small-cap ETFs: leaders or laggards?]
- iShares Russell 2000 Index Fund (NYSEArca: IWM)
For more information on indexing, visit our indexing category.
Max Chen contributed to this article.