What Is an Index?
Indexes have evolved from measures to targets to a new form of active management.
Indexes are meant to be measuring sticks. They give us a sense of where markets have been and where they stand today. The original stock market indexes did exactly that. Charles Dow, co-founder of Dow Jones & Co., first published an index of 11 stocks--nine of which were railroad companies--in his "Customer's Afternoon Letter" on July 3, 1884. The index was a measure of the stock price performance of the firms that formed the foundation of the U.S. economy at that time.
Fast forward nearly 135 years and a lot has changed. Dow's first index was a flop. His next was a hit. The Dow Jones Industrial Average, launched in 1896, still occupies prime real estate on the masthead of The Wall Street Journal (the successor to Dow's "Customer's Afternoon Letter") and is piped through a variety of media that would be unrecognizable to its creator. The index industrial complex that his original idea spawned might be jarring to Mr. Dow.