When it comes to tracking stock markets and sectors, the well known FTSE indices, including the FTSE 100, have a dominant position in the UK. But in the US there is a wider range of indexing groups that battle it out for the attention of investors seeking ‘benchmarks’. For investors looking to US markets for the first time, it’s worth exploring what some of these indexes can tell you.
This article is part of Stockopedia’s complete Guide to Getting Started in US Shares. You can read our introduction to the series here and a look at the diversification benefits of investing in the US here.
What is the Dow Jones Industrial Average?
Perhaps the most famous US index - and the one UK investors know the best - is the Dow Jones Industrial Average. It consists of just 30 major stocks including blue chip bellwethers like Goldman Sachs and Procter & Gamble.
The make-up of the Dow is not decided with transparent rules but rather on the consensus of an 'Averages Committee'. Changes to the index are extremely rare, newsworthy events. The committee chooses companies of excellent reputation, sustained growth and broad investor interest.
Unlike many other indexes, the Dow is price-weighted, which means that each company is given a weighting based on its stock price, rather than its market capitalisation. For this reason, many serious market observers consider it something of a relic; its constituents being unrepresentative of the wider economy and its price-weighting making it hard to track with institutional funds. Nonetheless it remains the most quoted of all the indices in the media and has to be watched.
What is the S&P 500?
Any UK investor wanting to keep an eye on the biggest stocks in the US need look no further than the S&P 500. This big beast of an index is one of the best known in the US and widely regarded as a barometer of the overall stock market.
The S&P 500 is a market capitalisation weighted index of the 500 largest companies traded on the NYSE and Nasdaq. Its giant scale means that trillions of dollars are benchmarked against it in both passive index trackers and actively managed funds.
Other S&P indexes include the mid-cap S&P 400 and small-cap S&P 600. Together with the S&P 500 they constitute the S&P Composite 1500. Many also follow the S&P 900 of…
