Benchmarks and Indices
Chapters in this video
- 0:00 Benchmarks versus indices: the measuring stick and the math
- 1:29 The S&P 500 and DJIA: 500 versus 30 stocks
- 2:20 Russell 2000 small-cap trap and Bloomberg Aggregate for bonds
- 3:31 Price-weighted versus market-cap weighted calculation methods
- 4:42 Stock splits: why the DJIA slices influence in half
- 5:47 You cannot buy scoreboards: indices, index funds, and ETFs
- 6:56 Matching investment strategies to the correct benchmark
- 7:31 Rapid-fire exam recap
What this video covers
- The exact difference between a benchmark (a chosen standard for measuring performance) and an index (a statistical calculation of securities performance), and why the terms are not interchangeable
- The composition and purpose of the six major indices: S&P 500, DJIA, NASDAQ Composite, Russell 2000, Bloomberg Aggregate Bond Index, and Wilshire 5000
- Why the Russell 2000 tracks small-cap stocks (the bottom 2,000 of the Russell 3000), not the 2,000 largest companies, and why this is a persistent exam trap
- Why the Bloomberg Aggregate Bond Index (formerly Barclays Aggregate), not any equity index, is the primary benchmark for United States (U.S.) investment-grade bonds
- How price-weighted indices assign influence based solely on share price, and why a stock split cuts a company's weight exactly in half in the DJIA
- How market-cap weighted indices assign influence based on total market value, and why a stock split has zero effect on weighting in the S&P 500
- Why an index is a mathematical calculation, not a purchasable product, and how index funds and exchange traded funds (ETFs) are the actual vehicles that track index performance
Read the full lesson, free
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