In choosing an appropriate benchmark, the most critical step is to determine an investment’s comparability. For example, in assessing a mutual fund’s results, it’s necessary to determine the fund composition. In a typical mutual fund, there may be a mix of investments — stocks from companies representing different industries, sectors, countries and market capitalizations, bonds of different maturities, durations and investment types, and possibly cash or cash equivalents. Look at the fund description to determine its composition. Here is an example from American Funds AMCAP Fund®:
Generally speaking, U.S. equities (stocks) can be benchmarked against the Standard & Poor’s 500 Composite Index, while investment-grade, U.S.-issued bonds are compared to the Bloomberg Barclays Capital Aggregate Bond Index. For a mutual fund heavily invested in tech stocks, the Nasdaq Composite Index may be a good choice since tech stocks are heavily represented in the index. Portfolios that include large-cap stocks from developed market countries are typically benchmarked against the Morgan Stanley Capital International EAFE (Europe, Australasia and the Far East) Index.
Below is a list of common indexes and their components.
The oldest and most frequently cited index, the Dow tracks the movement of 30 blue chip stocks, primarily industrials. When you think of the Dow, think of big companies like IBM and Coca-Cola, for example.
This index comprises 500 large-cap U.S. equities, and is widely considered representative of the U.S. stock market.
This index measures the results of all U.S. stocks with readily available price data.
The Russell 2000 Index comprises approximately 2,000 small U.S. companies, and the median market cap is around $500 million. Small-cap mutual funds typically measure results against this benchmark.
This index includes all of the stocks trading on the Nasdaq Stock Market, with listed companies representing industries such as technology, retail, communications, financial services and biotechnology.
In 1965, Capital Group created the first international index, which is today the most commonly referenced benchmark for large-cap, developed market funds. Until MSCI went public in 2007, the company’s only two shareholders had been Capital International and Morgan Stanley.
This broad-based index, a popular benchmark for index funds and exchange-traded funds, is representative of investment‑grade bonds traded in the U.S. The index includes Treasury securities, government agency bonds, mortgage‑backed bonds, corporate bonds and a small amount of foreign‑issued bonds traded in the U.S. Municipal bonds are excluded for tax reasons. The index was formerly called the Lehman Brothers Aggregate Bond Index.
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.