Benchmarks – What Is A Benchmark And Where Does It Come From?

Debra Morrison |

On Women and Money last week, we frequently mentioned “the benchmark”, asset managers who didn’t beat the benchmark, stocks that are measured against an index or benchmark…and ultimately, we promised to define what a benchmark was.

A benchmark, as it pertains to investing, is a standard used for comparison in order to gauge performance of a stock, bond, or mutual fund.

Which benchmark is used is determined by what is an appropriate measure for the stock, bond, or mutual fund. For instance, if a mutual fund invested primarily in large, US corporations listed on the New York Stock Exchange, then the Dow Jones Industrial Average could be an appropriate benchmark for comparison.

If this mutual fund then returned 10% in a certain period of time, while the Dow Jones Industrial Average returned 5% in the same period of time, then the mutual fund is said to “outperform its benchmark.” Whether you’re investing for beginners or a seasoned pro, you need a comparison or a benchmark to compare your results against. Wall Streeters have long been accused of picking a benchmark that suits a particular performance, rather than always going up against the most common, and best known indexes.

There are lots of indexes, all of which produce a benchmark/average/index. Here is a partial List Of Financial Market Indexes, an excerpt from Ms Morrison’s Dictionary of Useful Financial Investment Terms

  • Dow Jones Industrial Average – Although Charles Dow compiled the 30 stock index to gauge the performance of the industrial sector within the US economy, the index’s performance continues to be influenced by not only corporate and economic reports, but also by domestic and foreign political events. The Industrial portion of the name is largely historical, as many of the modern 30 components have little or nothing to do with traditional heavy industry. Its price-weighted average compensates for stock splits and other adjustments.
  • S & P 500 Index – The S&P 500® has been widely regarded as the best single gauge of the large cap U.S. equities market since the index was first published in 1957. The index includes 500 leading companies in leading industries of the U.S. economy, capturing 75% coverage of U.S. equities. The S&P 500 is a market value weighted index – each stock’s weight is proportionate to its market value.
  • S & P Mid-Cap 400 Index – This Standard & Poor’s index serves as a barometer for the U.S. mid-cap equities sector and is the most widely followed mid-cap index in existence. To be included in the index, a stock must have a total market capitalization that ranges from roughly $750 million to $3 billion dollars. S&P 400 MidCap Index is a value-weighted index, meaning that the stocks with the largest market capitalization have the most significant impact on the movement of the index. Similarly, smaller movements in the smallest companies in the index have virtually no effect on the overall movement of the index.
  • NASDAQ Composite – The Nasdaq Composite is comprised of over 3,000 common stocks, limited partnerships, ADRs, of both US and non-US companies. It’s followed as an indicator of the technology and growth company stocks’ performance.
  • Russell 1000 Growth – The Russell 1000 Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. It includes those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.
  • Russell 1000 Value – The Russell 1000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected growth values.
  • Russell 1000 Index – The Russell 1000 Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000® Index and includes approximately 1,000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000 represents approximately 92% of the Russell 3000 Index
  • Russell 2000 Growth – The Russell 2000 Growth Index measures the performance of the small-cap growth segment of the U.S. equity universe. It includes those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values.
  • Russell 2000 Value – The Russell 2000 Value Index measures the performance of small-cap value segment of the U.S. equity universe. It includes those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values.
  • Russell 2000 Index – The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000® Index representing approximately 8% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership.
  • Russell 3000 Growth – The Russell 3000 Growth Index measures the performance of the broad growth segment of the U.S. equity universe. It includes those Russell 3000 companies with higher price-to-book ratios and higher forecasted growth values.
  • Russell 3000 Value - The Russell 3000 Value Index measures the performance of the broad value segment of the U.S. equity universe. It includes those Russell 3000 companies with lower price-to-book ratios and lower forecasted growth values.
  • Russell 3000 Index – The Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market.
  • Russell MidCap Growth Index – The Russell Midcap Growth Index measures the performance of the mid-cap growth segment of the U.S. equity universe. It includes those Russell Midcap Index companies with higher price-to-book ratios and higher forecasted growth values.
  • Russell MidCap Value Index – The Russell Midcap Value Index measures the performance of the mid-cap value segment of the U.S. equity universe. It includes those Russell Midcap Index companies with lower price-to-book ratios and lower forecasted growth values.
  • Russell MidCap Index – The Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe. The Russell Midcap Index is a subset of the Russell 1000® Index. It includes approximately 800 of the smallest securities based on a combination of their market cap and current index membership. The Russell Midcap Index represents approximately 27% of the total market capitalization of the Russell 1000 companies.
  • Wilshire 5000 – Once 5000 stocks, this index now comprises over 6,700 stocks of publicly traded companies that are US headquartered, actively traded on the American Stock Exchange and are readily priced to the public. It’s a market capitalization-weighted index, which overweights higher firm value companies, and underweights those with a lower firm value.
  • Wilshire REIT Index – A market-weighted index of real estate partnerships, Real Estate Operating Companies, otherwise known as REOCs, and publicly traded real estate trusts, otherwise known as REITs.
  • EAFE – Europe, Australia & Far East Index, is an unmanaged market-value weighted index that measures the condition of overseas stock markets. Countries represented in the EAFE include France, Germany, UK, Japan and Hong Kong.
  • MSCI World Index – An index consisting of a wide selection of stocks traded in 23 developed countries. It is market capitalized weighted and is considered an important benchmark of the state of global stock markets
  • MSCI Europe – An index consisting of a wide selection of stocks traded in 23 developed countries- Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. It is market capitalization weighted and is considered an important benchmark of the state of global stock markets.
  • MSCI Emerging Markets – a market capitalized idex that measures the stock market returns of 21 emerging countries– Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey
  • Lehman Aggregate Bond Index – the best total market bond index used by more than 90% of all US investors, which includes government, mortgage-backed, asset-backed and corporate securities to simulate the entire universe of bonds whose maturities are over 1 year.
  • Lehman Government Bond Index – This index tracks most all of the US Treasury Bonds and US Government Agency bonds in the US, including the 1-3 Year Government Index as well as the 20 plus year Treasury Index.