Indexes: S&P 500, Nasdaq, Dow Jones and the S&P/BMV IPC
An index sums up how a group of stocks is doing. Knowing how each one is built helps you understand the news and what's inside your funds.
When a headline says "the market rose 1%", it's almost always talking about an index: a number that sums up the movement of a group of stocks. Indexes work as a market thermometer, as a benchmark for your investments and as the basis of many ETFs.
The most followed indexes
| Index | What it includes | How it weights |
|---|---|---|
| S&P 500 | About 500 of the largest U.S. companies | By market value |
| Nasdaq-100 | The 100 largest non-financial companies on the Nasdaq | By market value, with caps |
| Dow Jones Industrial | 30 large U.S. companies | By share price |
| S&P/BMV IPC | About 35 of the most traded companies on the BMV | By market value, with caps |
| MSCI World / ACWI | Thousands of companies in developed (and, in the ACWI, emerging) countries | By market value |
By market value or by price
In a market-value-weighted index, the largest companies weigh more. In the S&P 500, a few giant tech companies can make up a very large part of the index, so their moves drag the total. In the Dow Jones, which is price-weighted, the stock with the highest price weighs more, regardless of the company's size; that's why it's considered an old-fashioned method.
Price indexes and total return indexes
The indexes you see in the news are usually price indexes: they don't count dividends. A total return index assumes dividends are reinvested. Over decades the difference is big: dividends have been an important part of the stock market's return.
Why indexes are hard to beat
Many studies show that, over long periods, most active funds (the ones that pick stocks) return less than their benchmark index after fees. That's why index funds and ETFs became so popular: they don't try to beat the market, but to get what the market gives while paying little.
Index rebalancing
Every so often, those in charge of an index review who's in and who's out. A company that grows a lot can join the S&P 500; one that shrinks can leave. Funds that copy it have to buy or sell, which sometimes moves those stocks on the day of the change.
What an index is useful for
- To compare: if your U.S. stock portfolio gained 8% and the S&P 500 gained 15%, you may want to understand why.
- To understand the news: "the Nasdaq falls" usually means tech stocks are dropping.
- To choose funds: two ETFs tracking the same index hold almost the same; compare their fees.
Test what you learned
1. About how many companies are in the S&P/BMV IPC?
- About 35
- 500
- 3,000
Show the answer
About 35. It's the BMV's main index, with about 35 issuers.
2. In a market-value-weighted index, which companies weigh more?
- Those with the highest share price
- The largest ones
- They all weigh the same
Show the answer
The largest ones. Weight depends on each company's market value.
3. What does a price index not include?
- Dividends
- Large companies
- Price changes
Show the answer
Dividends. That's what total return indexes are for.
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Everything in this section is educational: it explains how investing works, it doesn't tell you what to buy.