The Education Space – What is an Index

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With so much happening on the Exchange Traded Fund’s (ETF’s) scene the intention of this education space is to cover the MEANING OF AN INDEX. Especially as a lot of ETF type investments (listed on Stock Exchanges around the World) are intended to mirror or replicate an INDEX.

Firstly, indexes are really just a way of recording multiple type investments – shares/bonds/cash etc within an OVERALL INDEX so the result of the Total Portfolio is more easily seen rather than analysing perhaps hundreds of companies.

For instance if an index (of a host of shares – 5 or 10 or 100 or 5000 companies) started at say a calculated index of 1000 and then a year later that index rose to 1100 then the return would be 10% for that year.

The most famous or well-known index for the average Australian is the All Ordinaries Capital Index commonly referred to as the ALL ORDS. It is a measure of the capital growth performance of the overall share market of 500 companies in Australia. Basically in the Finance Section of the News most nights on TV.

Some of other of the more well-known indexes are:

  • Dow Jones Index – 30 of the biggest companies in the US
  • ASX200 Index – Top 200 companies in Australia
  • S & P 500 Index – Top 500 companies in the US
  • FTSE – UK companies
  • NASDAQ Index – Tech companies (essentially) in US
  • etc etc

Most indexes are CAPITAL RETURNS based but there are other types being ACCUMULATION INDEXES which measure income (concept of reinvested interest or dividends) and capital growth.

Please note that you can invest into the most popular indexes very easily these days by way of these ETF’s.

The attached CREATED INDEX (purely for illustration purposes) shows how just by creating an index value of 1000 at the start of the portfolio – see the bottom line – then you can easily analyse a TOTAL CAPITAL RETURN OF THE OVERALL PORTFOLIO as seen over a year from the index growth of initially 1000 to 1337 being a 3.92% annual return for the 11 year plus dividends (assumed taken in each instance) which would average approximately 3.00% to 4.00% per annum.

At Plus1 we are available at any time to discuss issues of this nature with due regard to your investments or financial planning generally.

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