An index is a collection of securities (for example, stocks or bonds) that are often used as a measure of performance to represent a certain part or sector of a market. For example, the FTSE 100 is the top 100 stocks in the UK stock market as measured by market capitalisation (how big they are). The FTSE 100 is often used as a measurement of how the whole of the UK stock market is performing. This index includes some well-known UK stocks such as Vodafone, BT and Barclays. Each of the 100 stocks receive a weighting and the performance of the index is then calculated from all these stock’s individual performance and their respective weightings in the index.
There are many different index providers just like there are many different ETF providers. The index provider for the FTSE 100 is FTSE (Financial Times Stock Exchange) group. They also have thousands of other indices that track different countries, investment styles and sectors. Another well know index is the S&P 500. This is the top 500 companies in the US as measured by market capitalization and is often used as a measure of how the US stock market is performing. The index provider is Standard and Poor’s.
Indices can also track specific sectors of the market like financials companies, technology companies, utility companies etc. For example, the S&P 500 Information Technology index tracks the top technology companies in the US and contains companies such as Apple, Microsoft and Facebook.
Passive ETFs like the ones we use at Moola have the main objective of matching index that they track. For example, an ETF that tracks the FTSE 100 should have a very similar performance to the FTSE 100 index itself.