Performance indicators can be guide to future numbers
On the Money
From the September 2, 2011 print edition
Most of us are familiar with economic and financial indexes (or indices). We hear daily reports of the change in “The Dow Jones Industrial Average,” or the “Standard and Poor’s 500.” These measurements are designed to provide indications of performance for the group of securities or activities (such as consumer spending) they represent.
In general, an index is a statistical indicator providing a representation of the value of the securities (or activities) which constitute it. Indices often serve as barometers for a given market or industry and provide benchmarks against which financial or economic performance is measured.
An index itself merely reports what happened. Nevertheless, based upon the tenuous assumption that the markets have memory, investors seek to uncover underlying relationships that can be used predict the future.
When researching or monitoring a stock, bond, or mutual fund, indexes similar to the investment will reveal how its performance compares to similar investments. For stocks and bonds, the most common investment indexes are:
– Dow Jones Industrial Average: 30 U.S. “Blue Chip” stocks. Much of the public keeps track how the market is performing by this yardstick.
– Standard and Poor’s (S&P) 500: 500 large, domestic stocks.
– Wilshire 5000: The entire U.S. stock market. This is the most comprehensive domestic index.
– Russell 3000: Stocks of 3,000 of the largest U.S. corporations.
– Morgan Stanley Europe and Far East: The world’s major non-U.S. stock markets.
– Lehman Brothers Government Bond Index: U.S. government agency and Treasury bonds.
– Lehman Brothers Corporate Bond Index: Investment-grade corporate bonds.
However, given the relatively stagnant performance of the economy over the last several years, other indexes are receiving more attention; attempting to segregate and reveal information that would lead to prospective profit. Many investors are sharpening their look into the markets based upon geography or industry.
Here are some of the indexes that reflect this more focused look into investing behavior.
- NASDAQ Biotechnology Index: The NASDAQ Biotechnology Index contains companies that are classified according to the Financial Times and the London Stock Exchange (“FTSE”) Global Classification System as either biotechnology or pharmaceutical which also meet other eligibility criteria.
- NASDAQ Computer Index: The NASDAQ Computer Index contains NASDAQ listed companies classified as Computer Hardware, Semiconductors, and Software & Computer Services, including firms that manufacture and distribute computers and associated electronic data processing equipment and accessories, semiconductor capital equipment, manufacturers and distributors of wafers and chips, providers of computer services and IT consultants, Internet access providers, internet software and on-line service providers, and producers and distributors of computer software.
- Gold BUGS Index (HUI): An acronym for Basket of Unhedged Gold Stocks, the BUGS index is made up exclusively of mining stocks that do not hedge their gold positions more than a year-and-a-half into the future. When gold prices are on the rise, the Gold BUGS Index provides an excellent way for investors to capitalize on that increase. The index has a high correlation to the spot price (current price) of gold.
- S&P SmallCap 600: The S&P SmallCap 600 Index invests in a basket of small-cap equities. A small-cap company is generally defined as a stock with a market capitalization between $300 million and $2 billion.
- International Indices include the following major exchange indexes:
- FTSE Index – The Financial Times 100 Index, or FTSE, reports the performance of equities traded on the London Stock Exchange.
- Bovespa Index – tracks the performance of a basket of stocks that trade on the Sao Paulo Exchange.
- DAX Index – the most commonly cited benchmark for measuring the returns posted by stocks on the Frankfurt Stock Exchange.
- CAC-40 Index – the benchmark tracking index for the Paris Bourse.
- Hang Seng Index – the leading index for shares traded on the Hong Kong Stock Exchange.
- Straits Times Index – compiled by the newspaper of the same name, is Singapore’s premier equity index.
- KOSPI Index – In South Korea, the main tracking index is the Korean Composite Stock Price Index, or KOSPI for short.
One last specialized index is of note. The Domini 400 Social Index. This index is a market capitalization-weighted common stock index. It monitors the performance of 400 U.S. corporations that pass multiple, broad-based social and ethical screens. The index contains 250 companies from Standard & Poor’s 500 Index, 100 additional large companies not included in the S&P 500 but providing industry representation, and approximately 50 additional companies with particularly strong social characteristics.
As you search for potential investments, make sure to use the appropriate market index for your particular target. Market indices are useful tools for the trader but should never be used in isolation from other market factors.
© C. Stephen Guyer for American City Business Journals Inc. All rights reserved.