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INVESTMENT FUNDAMENTALS What is an index? © 2023 SEI 1 At its most basic definition, an index measures change in a set of representative data. Within the world of finance, an index tracks the performance of a group of assets in a standardized way. Indexes or indices (both are acceptable terms) measure the performance of a basket of securities which represent a certain area of the market. Specifically, they are typically used as a benchmark against which to evaluate the performance of an investment. This is critical when evaluating and understanding a portfolio's performance. Indexes can be either broad or narrow. For example, a broad index such as the Standard & Poor's 500 captures the performance of the 500 largest publicly traded U.S. companies. Conversely, there may be narrower sub-sets of the same index, such as the S&P 500 Consumer Staples Index which comprises those companies included in the S&P 500 that are classified as members of the consumer staples sector. Indexes can be global, such as the MSCI World Index, or capture specific geographies or related countries such as the MSCI Europe Index and the MSCI Emerging Markets Index, respectively. Additionally, indexes can reflect various asset classes. The Bloomberg U.S. Aggregate Bond index (commonly known as the "Agg") is a broad-based index representing investment-grade bonds traded in the U.S. Additionally, the Bloomberg Commodity Index tracks prices of futures contracts on physical commodities (crude oil, gold, sugar, coffee, and livestock). Cap-weighted versus equal-weighted indexes There often are two versions of the same index: an equal-weighted and a market capitalization-weighted index. An equal- weight index invests capital equally into all the constituents. For example, the S&P 500 Equal Weight Index includes all the stocks in the S&P 500; however, each company is allotted the same fixed weight in the portfolio. Conversely, a market capitalization-weighted (or "cap-weighted") index will invest more capital into the constituents with higher market caps. 1 Therefore, the performance of a cap-weighted index is driven more proportionately by the larger companies. Cap-weighted indexes are generally considered to be the industry standard. As such, when an index such as the S&P 500 is mentioned in the news or in industry publications, the cap-weighted index is typically what is used unless otherwise stated. 1 The total dollar market value of a company's outstanding shares of stock.

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