What Is a Broad-Based Index?
A broad-based index is designed to reflect the movement of a group of stocks or an entire market—also called a market index. One of the broad-based indexes with the fewest stocks is the Dow Jones Industrial Average (DJIA), which has just 30 stocks. One of the largest is the FT Wilshire 5000 Index (FTW5000). Other examples of broad-based indexes include the S&P 500 Index, the Russell 3000 Index, and the NASDAQ Composite Index.
- A broad-based index is a benchmark used to track the performance of a large group of stocks picked to represent the broader stock market.
- Owning funds that track broad-based indexes can add diversification to a portfolio.
- Examples of broad-based indices range from the S&P 500 and NASDAQ Composite to the Russell 3000.
- Many broad-based indexes are market-value weighted, which means that large companies have a greater influence on the index's price changes compared to smaller companies.
Understanding Broad-Based Indexes
An index is a tool used to track the performance of a basket of stocks. The methodology used to compute an index can vary, but the ultimate purpose of each one is to have a benchmark to view the average price move of a group over a period of time. Investors who want the maximum benefit of diversification can invest in securities that are included in an index or invest in other financial products—such as some index funds—that are made up of the stocks within the index.
Securities based on broad-based indexes, like index funds, allow investors to effectively own the same basket of stocks contained in a major index while committing relatively small amounts of capital.
An example is the SPDR S&P 500 Trust (SPY), an exchange-traded fund (ETF) that holds the same names as the S&P 500 Index. Investors can buy and sell shares of SPY as if buying and selling shares of stock. Each share represents an ownership interest in the components of the S&P 500 Index, but the cost of each share is a fraction of the cost of buying all five hundred stocks at once.
Examples of Broad-Based Indexes
Dow Jones Industrial Average (DIJA)
The Dow Jones Industrial Average, which is mentioned regularly by news commentators covering the stock market, has one of the fewest numbers of stocks among broad-based indexes. It is also the second-oldest U.S. market index after the Dow Jones Transportation Average (DJTA). While the transportation average (initially known as the Dow Jones Railroad Average) was first published in 1884, the industrial average was not calculated until 1896.
The "Industrial" portion of the name is largely historical, as many of the modern components have little to do with the heavy industry of the late 1800s. It was initially conceived by The Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow. It is now owned by S&P Dow Jones Indices, which is majority-owned by S&P Global.
The industrial average is the best known of the Dow Averages, which are named after Dow and one of his business associates, statistician Edward Jones. Although designed to reflect the strength of the U.S. economy, the index's performance is heavily influenced by global corporate and economic reports as well as domestic and foreign political events. War, terrorism, and natural disasters can all impact the Dow as well.
FT Wilshire 5000 Index (FTW5000)
Wilshire Associates, an investment management company, started the FT Wilshire 5000 Index, naming it for the approximate number of issues it included at the time. It was renamed the "Dow Jones Wilshire 5000" in April 2004, after Dow Jones & Company assumed responsibility for its calculation and maintenance.
On March 31, 2009, the index reverted back to the Wilshire 5000 name when Wilshire Associates terminated its deal with Dow Jones. Then in 2021, its name was changed to the current FT Wilshire 5000 Index as part of its partnership with The Financial Times.
While the original Wilshire 5000 Total Market Index had roughly 5,000 stocks, the list has shrunk to 3,687 stocks as of January 2022. Like the S&P 500, the index is calculated using a market-value weighted methodology, which means that larger companies will have a greater influence on the performance of the index compared to smaller ones. The Dow Jones Industrial Average, on the other hand, is price-weighted and higher-priced stocks have more sway in the index compared to low-priced stocks.
How Can I Invest in Broad-Based Indexes?
You cannot invest in indexes, but you can invest in index funds, such as exchange-traded funds (ETFs), that track indexes. Popular broad-based index ETFs include the SPDR S&P 500 ETF Trust (SPY), SPDR Dow Jones Industrial Average ETF Trust (DIA), and Vanguard Total Stock Market Index Fund ETF Shares (VTI).
What Is the Most Widely Cited U.S. Stock Market Index?
The Dow Jones Industrial Average, which includes 30 large-cap stocks, tends to be the most widely cited measure of the U.S. stock market.
What Is the Difference Between Broad-Based and Total Stock Market Indexes?
Broad-based and total stock market indexes can be used interchangeably. However, most broad-based indexes, such as the S&P 500 and Dow Jones Industrial Average (DIJA) include mostly large, well-known companies. Total stock market indexes, as the name implies, look to track the entire U.S. stock market, such as the CRSP U.S. Total Market Index and Dow Jones U.S. Total Stock Market Index, which have around 4,000 holdings each.