What is a 'Market Proxy'

A market proxy is a broad representation of the overall stock market. A market proxy can serve as the basis for an index fund or for statistical studies. The S&P 500 Index is the best known market proxy for the U.S. stock market. Index funds and ETFs have been constructed based on the S&P 500 Index. Academics and analysts use the S&P 500 as the proxy to perform various statistical research on stock market behavioral patterns.

BREAKING DOWN 'Market Proxy'

The S&P 500 Index is a broad proxy of the stock market based on market capitalization of the 500 largest companies traded on the NYSE and Nasdaq stock exchange. Most agree that it is a better proxy than the Dow Jones Industrial Average (DJIA), which arbitrarily uses nominal share prices to calculate the index value. This price-weighted index gives companies with higher share prices greater weight in the index, regardless of their importance in representing the relative industry standing in the economy.

Standard & Poor's Financial Services controls the composition of the DJIA Index. Although there is no equivalent market proxy for the bond market as comprehensive as the S&P 500 Index, informal references are made to dividend stocks being a proxy for the bond market. Utility and consumer staples stocks, in particular, since they pay consistent and safe dividends, are believed to be close in nature to bonds, which provide coupon yield.

Significance of a Market Proxy

There has been a mass migration of investor money from actively managed funds to passive funds in recent years. Vanguard, BlackRock and State Street have built AUM empires on passive vehicles based on the S&P 500 Index and many other proxies representing the international stock market, global stock market (U.S. + international) and segments of the stock market such as large capitalization stocks, medium-cap stocks, small-cap stocks and so on.

Indexed products have historically outperformed actively managed funds, but there is a growing debate about whether they have become too large to effectively serve the needs of investors. In the event of heavy or sustained market downturns, for instance, how will passive funds perform relative to actively-managed funds that have the flexibility to respond to changing market conditions and invest in assets not tied to the S&P 500 Index or other market proxies?

RELATED TERMS
  1. Proxy Materials

    Proxy materials are filed to shareholders before annual meetings ...
  2. Proxy Fight

    A proxy fight occurs when a group of shareholders join forces ...
  3. Proxy Directive

    Proxy directive is a legal document assigning the health care ...
  4. Proxy Vote

    A proxy vote is a ballot cast by one person or firm on behalf ...
  5. SEC Form DEF 14A

    SEC Form DEF 14A is a form that must be filed by or on behalf ...
  6. Passive Investing

    Passive investing is an investment strategy to maximize returns ...
Related Articles
  1. Investing

    Why Investors Should Look at the Proxy Statement

    The proxy statement is probably the most overlooked form that is filed with the SEC, find out why investors should promptly look at a proxy statement here.
  2. Investing

    Proxy Voting Gives Fund Shareholders a Say

    You have the right to take part in important company decisions by proxy.
  3. Investing

    Proxy Season 2016: Most Wonderful Time of the Year

    Each year, public companies hold shareholder meetings where individual and institutional investors vote on the future. Here is what to watch in 2016.
  4. Investing

    Shareholders: Vote Your Proxy and Be Heard

    Voting shares, in person or via proxy ballot, is a right every shareholder should exercise. Here's why.
  5. Investing

    The Lowdown on Index Funds

    If you can't beat the market, why not join it? Read on to see what your options are.
  6. Insights

    An Introduction to Stock Market Indices

    Lear more about the five most talked about stock indices and what makes them all different.
  7. Investing

    3 Index Funds with the Lowest Expense Ratios

    Learn about index mutual funds with the lowest expense ratios.
  8. Investing

    Passively Versus Actively Managed Mutual Funds

    Learn about the differences between actively and passively managed mutual funds and for which types of investors each management style is best suited.
RELATED FAQS
  1. How Do Proxy Fights Work?

    A proxy fight is when a group of shareholders are persuaded to join forces to win a corporate vote. Read Answer >>
  2. Passive vs Active Portfolio Management

    Understand the difference between active portfolio management and passive portfolio management, and how each strategy benefits ... Read Answer >>
  3. Why do investors use the S&P 500 as a benchmark?

    Learn about the advantages and disadvantages of using the S&P 500 as a benchmark for portfolio performance, and understand ... Read Answer >>
  4. How can I buy an S&P 500 fund?

    Looking for access to the S&P 500? Learn how to access an S&P 500 index fund or ETF. Read Answer >>
Trading Center