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Benchmark Index

What is a Benchmark Index?

Comparing yourself to others isn’t always a great idea, but for mutual funds, ETFs, and even portfolios, comparison is crucial. That’s why benchmarks exist. They give investors a point of reference they can use to measure how a fund has performed relative to the segment of the market it invests in.

Keep in mind that measuring a fund’s performance relative to a benchmark doesn’t tell you much about its absolute performance. For instance, a fund’s absolute return might be low, but if it competes in part of the market that fared poorly, it might have beaten the index by a wide margin. Of course, the opposite is true, too: A fund with an impressive return can lag its benchmark if it doesn’t have exposure to some of the index’s highfliers.

A common benchmark is the Standard and Poor’s 500 Index (informally called the S&P 500 Index). It contains the 500 largest companies in the United States. If you’re buying a mutual fund that invests in big U.S. companies, it might benchmark itself against the S&P 500.

There are many other benchmarks, too: For investment-grade bond funds, the Barclays Capital U.S. Aggregate Bond Index is a common benchmark. The Russell 2000 Index is a common yardstick for smaller-cap funds. If no standard benchmark is a great fit, as in the case of a multiasset portfolio, a custom benchmark can be created.


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