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What Are Benchmarks?
Benchmarks serve as a critical standard for measuring an asset’s value change or other investment metrics over time. In the realm of investing, benchmarks offer essential reference points for evaluating the performance of securities, mutual funds, and other financial instruments, serving as a comparative tool for investors.
Key Takeaways
- A benchmark is a standard used to measure the performance of securities, mutual funds, and investment managers.
- Common stock benchmarks include the S&P 500 and Dow Jones Industrial Average, which reflect large-cap equities’ performance.
- There are benchmarks for various asset classes, including equities, fixed income, and commodities, allowing for diversified performance assessments.
- When evaluating portfolio performance, comparing it to relevant benchmarks helps determine how well it is doing relative to the market.
Deep Dive Into Market Benchmarks
Market benchmarks are indexes—a market proxy—created to include multiple securities, assets, or other instruments to represent the performance of a stock, fund, or any other investment of the same type and composition.
Benchmark indexes have been created across all types of asset classes. For example, the S&P 500 and Dow Jones Industrial Average are popular large-cap stock benchmarks in the equities market.
Overview of Major Equity Indexes
The S&P 500 was created by Standard & Poor’s. It lists 500 companies—there are actually 505 stocks on the index—based on specific metrics and valuation techniques that reflect the best-performing stocks on the stock market (according to the professionals at S&P).
The Dow Jones Industrial Average comprises 30 U.S. blue-chip stocks—the stocks of well-recognized, established, and financially sound companies.
The S&P 500 lists more stocks than the Dow, but they share many similar stocks:
- Apple
- Microsoft
- Boeing
- Alphabet (Google)
- Cisco
- Caterpillar
- Proctor & Gamble
Many use these indexes to gauge the stock market’s performance, though they only cover a fraction of publicly traded stocks.
Mutual fund investors often use Refinitiv Lipper indexes, covering the 30 largest funds in a category, while international investors might opt for MSCI Indexes. The Wilshire 5000 is also a popular benchmark; it represents all of the publicly traded stocks in the U.S.
Key Fixed Income Benchmarks Explained
Fixed income indexes track the performance of assets like bonds and treasuries, used for income or capital preservation in declining markets.
Some examples of top fixed income benchmarks include the Bloomberg Aggregate Bond Index (known as the Agg), the Bloomberg Capital U.S. Corporate High Yield Bond Index, and the Bloomberg Capital U.S. Treasury Bond Index.
Essential Commodity Index Benchmarks
Commodity indexes track the performance of various commodities. For example, the Bloomberg Commodity Index (BCOM) consists of 23 exchange-traded physical commodities futures. The index measures 21 commodities across five different sectors and acts as an indicator of the performance of the commodities market. These sectors include:
- Agriculture
- Energy
- Industrial Metals
- Precious Metals
- Livestock
Beyond traditional benchmarks for broad market traits like large-cap, mid-cap, or small-cap, you’ll find indexes for sectors, dividends, market trends, and themed investments.
Important
Thematic indexes are lists of stocks that meet specific criteria for a theme, such as environmental, social, and governance (ESG) or sustainability.
Popular Investment Benchmarks to Know
The following are examples of the most popular benchmarks used in investing.
| Common benchmarks, by market | ||
|---|---|---|
| Market | Benchmark | What It Represents |
| U.S. Equities | S&P 500 | The top 500 publicly-traded companies in the U.S. stock market. |
| Debt Markets | U.S. Treasurys | The return on a 10-year U.S. Treasury Bill, representing the returns on the lowest-risk debt instruments. |
| Commodities | Dow Jones Commodity Index | A broad-market measure of the strength of the commodities market based on a cross-section of futures prices. |
Practical Applications of Benchmarks in Investing
When evaluating your investment portfolio’s performance, it’s important to compare it against a benchmark representing the industry, sector, and market segment to which it belongs. However, if your portfolio is diversified, you may not be able to compare the total portfolio against one index—you may need to evaluate it in sections based on how you’ve allocated your investments.
Using Information Already Provided
Most retail investors don’t build their portfolios by choosing individual stocks. However, it is possible to do so—but in many cases, it is simply too expensive and time-consuming to evaluate stocks and purchase the ones that meet your investing criteria. So, many choose mutual funds or exchange-traded funds (ETFs) that mirror the performance of specific indexes.
If you have a fund—or more than one—in your portfolio, you can compare the information fund managers already provide to see how your funds are doing compared to the indexes they mirror.
For example, the Vanguard Mega Cap Growth ETF (MGK) is an exchange-traded fund that tracks the performance of the CRSP U.S. Mega Cap Growth Index. If you had purchased shares of MGK and wanted to evaluate its performance, you’d first find the fund’s page on Vanguard’s website and locate the “Performance and Fees” tab, and ensure “Summary” is underlined by clicking on it. You’ll see the following information:
You can see the fund’s changes in market price from its inception to the last month’s performance and compare it to its benchmark. Then, find the historical volatility and see how the fund’s return and risk compares to that of its benchmark:
R-squared measures how closely the fund has tracked its benchmark—in MGK’s case, it has very closely matched the returns of its benchmark (a value of 1.0 indicate tracking, while less than 1.0 indicates less tracking).
Beta is a measure of the fund’s risk compared to that of the benchmark—again, MGK has matched its benchmark’s risk level (again, 1.0 indicates it has tracked, while less or more than 1.0 indicates less or more tracking, respectively).
MGK has historically matched the return and risk of the benchmark index it was designed to track, give or take a few percentage points. However, when compared to the Dow Jones U.S. Total Stock Market Index, MGK has returned less and has slightly more risk.
What Is the Best Stock Benchmark?
The best stock benchmark is an index that matches your portfolio or holdings the closest.
Is the S&P 500 a Good Benchmark?
It is very commonly used, but many more can be used based on how the benchmark is designed. Some widely used benchmarks in the stock market are the Wilson 5000, Dow Jones Industrial Average, and the Russel 2000.
How Is a Benchmark Calculated?
Different indexes use different methods to calculate their performance. For example, the S&P 500 uses a free-float market capitalization method.
The Bottom Line
Benchmarks serve as essential tools for investors when evaluating and comparing the performance of their holdings to an appropriate sector or market. They provide insights into market health by reflecting broader market trends and the performance of specific asset classes. While the landscape of benchmarks adapts to evolving investing strategies and sentiments, it’s crucial to remember that benchmarks represent past performance and do not predict future results. Investors should use benchmarks to inform strategic adjustments and evaluate portfolio effectiveness, helping to refine their investment strategies over time.
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