What Is a Subindex?
The term subindex refers to a smaller component of a larger index that tracks the performance of a group of securities. The securities in a subindex are usually stocks that share common variables differentiating them from other securities in the larger index.
The characteristics of a subindex's components tend to be narrower and more specific than the broader ones that make up larger indexes, such as market capitalization, investment styles, or certain sectors.
A subindex may also be constructed from broader economic indexes that measure things like home prices, inflation, and consumer sentiment.
- A subindex is one made up of components of a larger index that share one or more common attributes.
- While large indexes are broader, subindexes are combined as a separate group because of common sub-characteristics shared by securities.
- Subindexes allow investors to value assets that are held in a basket.
- They may also be based on broader economic indexes that measure various economic trends, such as home prices and inflation.
- The S&P 500 is a large index that is divided into smaller subindexes based on the sectors of individual companies.
How Subindexes Work
Indexes are used throughout the financial and economic worlds. They are primarily used to help value assets that are held in a basket. These assets or securities usually share certain characteristics, such as market cap, investment styles (growth or value investing), or the industries they represent.
Indexes are typically composed of a hypothetical portfolio of securities. As such, investors can use them as benchmarks to track the performance of assets they hold. For instance, the S&P 500 tracks large-cap stocks, allowing investors to gauge the direction of the overall economy and track the performance of the large-cap stocks in their own portfolios.
As the name implies, a subindex is a group of securities that make up a larger classification. They are combined as a separate group because of common sub-characteristics shared by securities. For example, the S&P 500 has a number of subindexes that divide companies based on the sectors in which they operate, like health care and energy. These can be divided up even further into other subindexes based on the types of companies they represent, such as pharmaceuticals and gas companies.
Subindexes may also be based on broader economic indexes that measure various economic trends. For example, these subindexes may measure and weigh the importance of things like home prices and inflation. Subindexes also measure trends like consumer sentiment.
Think of a subindex the same way you would as a sub-survey that asks follow-ups to a larger group of questions. In this vein, a subindex tracks the performance of a smaller related group of securities that are part of the larger group of securities.
Rather than buy shares of every company in a given industry or sector, you can get exposure to all of them in a single investment by buying an index fund that aligns with a sector subindex. Such investments are called exchange-traded funds (ETFs). These vehicles allow smaller investors to buy a diversified basket of an entire grouping without a big cost. Commissions charged for ETFs, if any, may be low, and their expense ratios typically fall below 1%.
ETFs are similar to mutual funds but trade like stocks and they allow an investor to get exposure to a wide range of investments in a sector or industry without needing to research individual stocks. Many financial advisors recommend that investors try to maintain a portfolio that offers good exposure to all of these industries and sectors.
Example of a Subindex
A grains subindex might only track soybeans, wheat, and corn, providing a snapshot of just one part of the overall agriculture sector index. Similarly, a copper subindex would track the performance of just one metal, while a broad-based metals index would track the performance of all metals.
The consumer discretionary sector consists of businesses that have demand that rises and falls based on general economic conditions, such as firms that sell washers and dryers, sporting goods, new cars, and diamond engagement rings. This sector contains at least twelve industries. Each of these industries has a corresponding subindex that an investor can buy into:
- Automobile components
- Diversified consumer services
- Hotels, restaurants, and leisure
- Household durables
- Internet and catalog retail
- Leisure products
- Multi-line retail
- Specialty retail
- Textile, apparel, and luxury goods.
Present Situation Index (PSI)
The Present Situation Index (PSI) is another example of a subindex. This one falls under the Consumer Confidence Index (CCI). The CCI is a broad measure of people's expectations about near-future economic performance, while the PSI emphasizes attitudes toward business and employment conditions.
The PSI is combined with another subindex, the Expectations Index, which asks consumers about their expectations for economic activity. Together, these two subindexes form the CCI, which is published each month by the Conference Board.