|
|
|
|
Extra
What all those indexes really mean
Wilshire 5000, Russell 3000, S&P 500 (or 100): Counting down the indexes is easy, but figuring out which ones bear watching isn't. Here's a rundown to help you get started.
By Scott Burns
You can slice and dice the stock market more ways than the old Veg-a-matic could slice and dice your carrots.
That message comes through loud and clear when you explore the indexes that describe the domestic stock market. And new indexes are being added faster than you can change TV channels. So let's take a quick tour, check the high points and see if we learn anything that will affect how we invest.
The biggest of all the domestic stock indexes is the Wilshire 5000 ($TMW.X), created by Wilshire Associates in 1980. When it was created, it captured the total market value of the 5,000 largest publicly traded domestic companies. Today, it contains more stocks and reflects total domestic market capitalization of some $10.1 trillion -- but it's still called the Wilshire 5000.
The next broad index is the Russell 3000 ($RUA.X). Created by the Frank Russell Co. in 1978, the Russell 3000 is a list of the 3,000 largest domestic stocks. Although the number of stocks in the index is about half the size of the Wilshire 5000, it captures 98% of all domestic equity capitalization.
The 3,000, in turn, are divided into the Russell 1000 ($RUI.X) and Russell 2000 ($RUJ.X) indexes. The Russell 1000, represents the 1,000 largest domestic stocks. It accounts for about 92% of all domestic market value. The Russell 2000, which is generally used as a proxy for small-cap stocks, accounts for about 6% of all domestic stocks.
Now, the name everyone knows
The Standard & Poor's 500 index ($INX) -- the only one mentioned that is a household name -- accounts for about 79% of all domestic equity value. As with all these indexes, the S&P 500 is market-capitalization weighted -- the greater the total value of a stock, the greater its weight in the index. The most common criticism from investment professionals is that such indexes aren't true portfolios because they are highly concentrated. The performance of General Electric (GE, news, msgs), the largest company in market value at $290 billion, simply dwarfs the performance of Allegheny Technologies (ATI, news, msgs), the smallest company, with a market value of only $619 million.
A further indication of the giantism that prevails in our stock market (and every other market in the world) is the Standard & Poor's 100 index ($OEX). Its 100 companies represent about 57% of all market capitalization in the United States.
All this and we haven't even begun to describe the other indexes. The Russell indexes are subdivided into growth and value subsets. I've mentioned only two of the S&P indexes when they actually cover the entire world. And I haven't even mentioned the indexes from Dow Jones, Salomon Brothers or Morgan Stanley.
No 'best' index
What does it all mean in practical terms?
For most people, not much. The best way to be an index investor is to find a broad, low-turnover index that faithfully represents the performance of the U.S. stock market. Everything that doesn't do that is a bet on a particular segment of the market. In the year ending March 31, 2003, for instance, the S&P 500 index and the Russell 3000 index had portfolio turnover rates of 5% -- but the Russell 2000 growth index ($RUO.X) had a turnover rate of 41%. Long term, turnover loses tax efficiency and raises costs.
So which index is the best broad bet on the U.S. stock market?
It depends on how you invest and how thin you want to slice expenses. Vanguard 500 Index fund (VFINX), the core of the old Couch Potato portfolio, is still a good bet. So is Vanguard Total Stock Market Index fund (VTSMX), which incorporates the extra return of small stocks. As a percentage player, I'd go for the broadest U.S. index you can conveniently buy.
The real question is seldom mentioned. U.S. stocks account for more than 50% of still broader indexes such as the Standard & Poor's Global 1200 Industrials ($SGNY). Yet few investors have even 10% of their money invested overseas, let alone 40% or 50%.
Shouldn't we have more money invested outside the U.S. stock market?
|
|
|
|
