Benchmark

Loading the player...

DEFINITION of 'Benchmark'

A benchmark is a standard against which the performance of a security, mutual fund or investment manager can be measured. Generally, broad market and market-segment stock and bond indexes are used for this purpose.

BREAKING DOWN 'Benchmark'

When evaluating the performance of any investment, it's important to compare it against an appropriate benchmark. In the financial field, there are dozens of indexes that analysts use to gauge the performance of any given investment including the S&P 500, the Dow Jones Industrial Average, the Russell 2000 Index and even competitor funds. Mutual fund investors may use Lipper indexes, which use the 30 largest mutual funds in a specific category, while international investors may use MSCI Indexes. 

Setting a benchmark can help an investor communicate with their portfolio manager what they’re hoping to achieve with their investment, so that the portfolio manager will make decisions with the investor's goals in mind. While a benchmark can help a portfolio manager, it’s important that the benchmark being set is right for the investors goals. 

An investor's benchmark should reflect the amount of risk he or she is willing to take, the amount to be invested, and the cost the investor is willing to pay. A benchmark should also mirror the investment style of the portfolio. As stated above, mutual funds, international investors, and other investors use different indexes as benchmarks for their investment portfolios because the type of investments they’re making are of a different nature. Some portfolios are hard to find benchmarks for, like real estate portfolios, where each investment is different in nature.

Some managers seek simply to meet benchmarks, while others work to beat them. While beating a benchmark can make investors happy, providing too much of an incentive to do so can force a manager to take undue risk with a portfolio. 

Passive or Active Management

Disagreements about the value of benchmarks can in some ways be chalked up to a difference in fundamental questions about management style. Managers who subscribe to the Efficient Market Hypothesis (EMH) claim that it is essentially impossible to beat the market, and then by extension, the idea of trying beat a benchmark isn’t a realistic goal for a manager to try and meet. Nonetheless, active managers who manage to beat benchmarks do enjoy a certain loyalty from investors despite the difficulties of replicating those types of returns on a regular basis. 

History of the Term

The term ‘Benchmark’ has its etymological roots with cobblers who used it in reference to the measure of a persons foot for shoes. The measurement was usually taken by placing the customers foot on a bench and making marks in order to take the measurement. 

RELATED TERMS
  1. Benchmark Bond

    A bond that provides a standard against which the performance ...
  2. Index Hugger

    A managed mutual fund that tends to perform much like a benchmark ...
  3. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's ...
  4. Passive Management

    A style of management associated with mutual and exchange-traded ...
  5. Wilshire 5000 Total Market Index ...

    A market capitalization-weighted index composed of more than ...
  6. Index Fund

    An index fund is a type of mutual fund with a portfolio constructed ...
Related Articles
  1. Mutual Funds & ETFs

    5 Vanguard Fixed Income Fund Outperformers

    Discover analyses of three Vanguard fixed-income funds that have historically outperformed their benchmark indexes, and learn about their characteristics.
  2. Bonds & Fixed Income

    PIMCO - How It Has Fared Since Its Gross Departure

    Learn about how PIMCO has seen massive outflows of investor capital since Bill Gross left the firm. Read about the recent performance of its bond funds.
  3. Bonds & Fixed Income

    The Top 5 Core Bond Funds for 2016

    Learn about mutual funds that are appropriate for core bond holdings. Read about how the expense ratios for mutual funds can impact investor returns.
  4. Mutual Funds & ETFs

    Grading Bill Gross at Janus

    Learn about how Bill Gross, once the head of the largest mutual fund in the market, has had poor investment results at his new fund.
  5. Mutual Funds & ETFs

    The Top 4 Platinum ETFs for 2016 (PPLT, PTM)

    Examine the available exchange-traded fund investments that offer investors direct exposure to the platinum market in the metals and mining sector.
  6. Mutual Funds & ETFs

    XLV: Health Care Select Sector SPDR ETF

    Learn about the Health Care Select Sector SPDR Fund including its performance, current holdings, recent performance and the outlook for the ETF.
  7. Mutual Funds & ETFs

    XBI: SPDR S&P Biotech ETF

    Discover the investment management style of SPDR S&P Biotech ETF, and learn which investors can benefit from the fund's focused biotech holdings.
  8. Mutual Funds & ETFs

    VHT: Vanguard Health Care ETF

    Learn about the Vanguard Health Care ETF, its holdings and how it may be appropriate for a growth-oriented investor who wants to invest in the sector.
  9. Mutual Funds & ETFs

    SCHX: Schwab US Large-Cap ETF

    Discover how the Schwab U.S. Large-Cap exchange-traded fund is managed, the index it tracks and the investors for which it is most appropriate.
  10. Mutual Funds & ETFs

    SOXX: iShares PHLX Semiconductor ETF

    Learn about the Shares PHLX Semiconductor ETF, its holdings, and its suitability for certain types of investors, because it is a volatile fund.
RELATED FAQS
  1. What are the main benchmarks that track the telecommunications sector?

    Performance measuring and benchmarking are constantly changing in the telecommunications sector because of the evolving dynamics ... Read Full Answer >>
  2. What are the most important equity market indexes?

    The most important equity market indexes are the S&P 500, Nasdaq Composite and Russell 2000. These indexes in total provide ... Read Full Answer >>
  3. What are the main benchmarks that track the performance of the Internet sector?

    The main benchmarks that track the performance of the Internet sector are the Nasdaq Composite Index, the First Trust Dow ... Read Full Answer >>
  4. What are the primary benchmarks that track the electronics sector?

    Some of the main benchmarks that track the electronics sector are the book-to-bill ratio, cash flow-to-debt ratio, debt-to-capital ... Read Full Answer >>
  5. What are most popular benchmarks that track the chemicals sector?

    The most popular benchmarks that track the chemicals sector are the Dow Jones U.S. Chemicals Index, the Dow Jones Industrial ... Read Full Answer >>
  6. What are the main benchmarks for tracking the performance of the metals and mining ...

    Benchmarks serve as initial points of reference against which portfolios, individual stocks or stock sectors can be compared ... Read Full Answer >>
  7. What are the main benchmarks that track the performance of the financial services ...

    The number of possible benchmarks that investors or analysts can choose from is extensive, especially for a sector as large ... Read Full Answer >>
  8. Who determines the LIBOR rate?

    The LIBOR rate, or London Interbank Offered Rate, is a benchmark rate at which individual contributor panel banks can borrow ... Read Full Answer >>
  9. What are the most common ETFs that track the financial services sector?

    The Standard & Poor's Depositary Receipt (SPDR) Financial Select Sector Fund (XLF) has net assets of $17.73 billion and ... Read Full Answer >>
  10. What are the most common ETFs that track the forest products sector?

    There are two common exchange traded funds (ETFs) that track the forest products sector: the Guggenheim Timber ETF (CUT) ... Read Full Answer >>
  11. How do you calculate r-squared in Excel?

    R-squared is a statistical relationship between two series of events. It is also a risk measure that is used in economics ... Read Full Answer >>
  12. What does a mutual fund's beta coefficient measure?

      Evaluating a mutual fund involves comparing returns, expenses and risk profiles with other funds. It can be quite simple ... Read Full Answer >>
  13. Is tracking error a significant measure for determining ex-post risk?

    Before we answer your question, let's first define tracking error and ex-post risk. Tracking error refers to the amount by ... Read Full Answer >>
  14. What should I use as a benchmark for my small-cap stock portfolio?

    When creating a stock portfolio, it is important to have a benchmark against which you can compare your returns. Comparing ... Read Full Answer >>
  15. What does it mean when people say they "beat the market"? How do they know they have ...

    "Beating the market" is a difficult phrase to analyze. It can be used to refer to two different situations: 1. An investor, ... Read Full Answer >>
Hot Definitions
  1. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  2. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  3. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  4. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  5. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
Trading Center