A benchmark serves as a baseline for investors to use when measuring the performance of a portfolio.
What is a benchmark?
Choosing benchmarks depends on the goals of each investor. An investor who wants to see how well they can outperform the market may use the performance of the S&P 500 as a benchmark. If their returns exceed that of the S&P 500, then they have outperformed a portfolio of the 500 largest companies in the U.S. stock market.
Alternatively, investors who favor an ESG investment style may choose a benchmark that is constructed with ESG-oriented values instead. For example, an investor who wants to invest in companies that prioritize gender equity may use the Morningstar® Developed Markets ex-Japan Gender Diversity Index(SM) as a benchmark.