Lesson 6 of 7 · All lessons in this module
- What an index is: value, price return and total returnVideo lesson
- Building an index: target market, constituents and weighting
- Price-weighted and equal-weighted indexesVideo lesson
- Market-cap, float-adjusted and fundamental weightingVideo lesson
- Rebalancing, reconstitution and what indexes are used for
- Types of equity indexes
- Fixed-income, commodity, real estate and hedge fund indexes
Lesson 6 of 7 · 11 min
Types of equity indexes
Equity indexes come as broad market, multi-market, sector and style indexes; each slices the stock market a different way, and the slicing rules differ between providers.
In short
- A broad market index represents a whole equity market, typically covering more than 90% of it. Newer wording calls that full-coverage index a composite, and 'broad-based' then means the tier of largest listed, float-adjusted, cap-weighted firms.
- Multi-market indexes combine several countries or regions, grouped by geography and level of economic development (developed, emerging, frontier); markets are reclassified over time.
- Some multi-market indexes cap-weight stocks within each country but weight countries by GDP: a form of fundamental weighting.
- Sector indexes come in families whose sum is roughly a broad index; they help separate stock selection from sector allocation skill. No universal sector classification exists.
- Style indexes group stocks by size (large, mid, small) and value/growth. Definitions differ across providers, and stocks migrate between styles, so style indexes have higher turnover than broad indexes.
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