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The Short Answer

How Well Do You Know Your Indexes?

We offer a quick guide to what's included in some of the most widely tracked benchmarks.

Question: I want to build a portfolio using only index funds, but I have trouble keeping them all straight. Can you explain which indexes do what?

Answer: Finding index funds that track specific security types or slices of the market has never been easier. In fact, Morningstar's database lists more than 1,700 index-based exchange-traded funds and mutual funds on the market today (not including funds of funds), with nearly half (48%) starting up within the past five years. With so many new index funds being introduced, it's easy to get lost among all the choices.

Aside from looking at a fund's expense ratio, index-fund investors should consider how the fund tracks its index and which index is being used to provide exposure to a given security type because funds within the same category may track different benchmarks. (You can read more about the topic in this article.) 

To help with this last piece of the puzzle, we've assembled a brief glossary of commonly used indexes and what they include. Unless specified, all are cap-weighted, meaning that the allocation to each stock is based on the total combined value of all its shares (its market capitalization) or, in the case of bond indexes, the total combined market value of each bond type in the index. Typically float-adjusted versions of the indexes are used, meaning that only securities traded on the open market are included in determining their cap-weighted value, though non-float-adjusted versions may also be available. (You can read more about float-adjusted indexing here.)

A comprehensive list of all indexes tracked by ETFs and mutual funds or used as benchmarks would be quite long, but those mentioned below are among the most widely used (we've included the CRSP indexes used by Vanguard because of the large amount of assets invested in Vanguard funds that track them). In some cases variations on the indexes are used, such as the Russell 1000 Value and Russell 1000 Growth indexes, which are made up of stocks in the Russell 1000 with value or growth characteristics. 

U.S. Stock Indexes
CRSP US Total Market Index: Consists of about 3,700 companies of all sizes, including nearly all publicly traded U.S. stocks.

CRSP US Mid-Cap Index: Consists of about 370 companies that fall between the top 70% and the top 85% of publicly traded U.S. stocks (in terms of market cap), with an average market cap of around $8.6 billion. 

CRSP US Small-Cap Index: Consists of about 1,450 companies that fall between the bottom 2% and the bottom 15% of publicly traded U.S. stocks, with an average market cap of around $2 billion. 

Dow Jones Industrial Average: Although tracked by just a handful of funds, it remains an important benchmark for U.S. stock market performance, tracking 30 bellwether stocks. The index is price-weighted rather than cap-weighted, meaning that companies with high prices per share take up a greater weighting than companies with lower share prices.

Dow Jones US Total Stock Market Index: Consists of more than 3,700 U.S. companies of all sizes, including nearly all publicly traded U.S. stocks.

MSCI US Broad Market Index: Consists of about 3,250 U.S. companies of all sizes, including most publicly traded U.S. stocks. 

Russell 1000: Consists of 1,000 of the largest U.S. companies, representing about 92% of the U.S. market.

Russell 2000: Consists of 2,000 of the smallest U.S. companies, representing about 10% of the Russell 3000. Average market cap is $1.8 billion. 

Russell 3000: Consists of 3,000 of the largest U.S. companies, representing about 98% of the investable U.S. equity market.

S&P 500: Perhaps the most widely used of all equity indexes, it consists of 500 of the largest U.S. companies, representing about 80% of the investable U.S. equity market. Although the index is market-cap-weighted and float-adjusted, membership in the index is not based purely on market cap, as discussed in this article.

S&P Composite 1500: Consists of 1,500 companies of all sizes, combining the constituents of the S&P 500, the S&P MidCap 400, and the S&P SmallCap 600. It represents about 91% of the available U.S. market cap.

S&P MidCap 400: Consists of 400 U.S. companies with market caps between $1.2 billion and $5.1 billion, representing about 7% of the market, with an average market cap of $4.3 billion.

S&P SmallCap 600: Consists of 600 U.S. companies with market caps between $350 million and $1.6 billion, representing about 3% of the market, with an average market cap of $1.3 billion.

Wilshire 5000 Total Market Index: Consists of more than 5,000 U.S. companies, including all publicly traded U.S. stocks. No longer widely used.

Foreign Stock Indexes
FTSE Developed ex North America: Consists of 1,350 large- and mid-cap stocks of companies based in developed markets across Europe, Australia, and Asia, including South Korea.

FTSE Emerging Index: Consists of nearly 900 stocks from 22 emerging markets.

FTSE Global All Cap ex US Index: Consists of about 5,500 stocks of all sizes from outside the U.S.

MSCI ACWI ex USA Index: Consists of more than 1,800 large- and mid-cap stocks across 45 developed and emerging markets outside the U.S.

MSCI EAFE: Consists of nearly 900 companies in 21 developed nations in Europe, Australasia, and the Far East.

MSCI Emerging Markets: Consists of more than 800 companies in 23 emerging-markets nations. Unlike the FTSE Emerging Index, this index includes South Korea.

There also are many indexes that focus on specific regions or countries, such as the MSCI Far East Ex Japan, MSCI Latin America, MSCI China, and MSCI India indexes.

Bond Indexes
Barclays Aggregate Bond Index: Tracks the performance of the U.S. investment-grade, fixed-rate, taxable-bond market, including Treasuries, corporate bonds, and mortgage-backed securities while excluding Treasury Inflation-Protected Securities and junk bonds. It is the most widely used benchmark for U.S. bond performance. Some index funds track a non-float-adjusted version of the index.

Barclays U.S. Municipal Index: Tracks the performance of the tax-exempt bond market, including state and local general-obligation bonds and revenue bonds.

You can find out which index Morningstar uses as a benchmark for a given fund by looking under the fund's Performance tab on Morningstar.com or by looking at the Morningstar Category Classifications document.

Information, including the number of constituents, is the most recent available from the index providers.

Have a personal finance question you'd like answered? Send it to TheShortAnswer@morningstar.com.

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