What Is an Index and How to Invest in One
Many or all of the products featured here are from our partners who compensate us. This influences which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money.
The investing information provided on this page is for educational purposes only. NerdWallet does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.
What is an index?
An index tracks the performance of a group of pre-selected investments, such as stocks. For example, the S&P 500 index tracks the performance of 500 of the largest U.S. companies. Investors gauge the performance of stocks, bonds or mutual funds by comparing them with the performance of an index.
The S&P 500 and the Dow Jones Industrial Average are two of the most well-known stock market indexes. While these indexes track the broad market and large company stock movements, other indexes may track only a certain industry or market sector.
» Learn more: What is the S&P 500?
Index investing: Index funds and ETFs
Individual stocks and actively managed mutual funds attempt to “beat” the market — that is, perform better than their benchmark indexes. But these attempts often fail, and more investors are using passive investing strategies: index funds or exchange-traded funds that aim to mirror broad-market or sector performance rather than beat it.
Index funds and ETFs are funds that hold stocks that are representative of an entire index, such as the S&P 500, so that the performance rises and falls alongside that benchmark index. As index values tend to rise over time, index funds and ETFs have become an important way that investors build long-term wealth.
» Ready to start investing? Understand how to invest with index funds
NerdWallet rating 5.0 /5 | NerdWallet rating 4.7 /5 | NerdWallet rating 5.0 /5 |
Fees $0 per trade for online U.S. stocks and ETFs | Fees $0 per trade | Fees $0 per trade |
Account minimum $0 | Account minimum $0 | Account minimum $0 |
Promotion Get $100 when you open a new, eligible Fidelity account with $50 or more. Use code FIDELITY100. Limited time offer. Terms apply. | Promotion Up to $600 when you invest in a new Merrill Edge® Self-Directed account. | Promotion Get up to $600 or more when you open and fund an E*TRADE account |
Stock index examples
Here are some common indexes that investors — as well as a range of index funds and ETFs — follow:
1. S&P 500 Index: The S&P 500 tracks the market moves of around 500 of the largest publicly traded companies in the U.S. The index is a representation of leading companies in leading industries and is capitalization-weighted, which means each stock is weighted proportionately to the company’s market capitalization. For example, a company whose total shares are valued at $100 billion is weighted more heavily than a $10 billion company. Learn how to invest in the S&P 500.
2. Dow Jones Industrial Average: The DJIA follows the performance of the 30 largest U.S. companies, also known as “blue chip” stocks. Market capitalization is not considered in this index.
3. Bloomberg Barclays U.S. Aggregate Bond Index: Also known as the Agg, this is a broad index that tracks the U.S. bond market. The index measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market.
4. Nasdaq Composite Index: The Nasdaq tracks the performance of more than 3,000 technology-related companies.
5. Russell 2000 Index: This index tracks 2,000 smaller — also known as small-cap — companies with market capitalization between $300 million and $2 billion.
» Explore further: What are the best index funds?
