Should You Compare Your Own Funds to the S&P 500 and DJIA?

For many investors, a high-performance fund is one that zooms ahead of the market. But what is the market?

As a pacesetter for their funds, investors often turn to the performance of a widely used index such as the Dow Jones Industrial Average – the average value of 30 large industrial stocks – or perhaps the S&P 500 index, which includes stocks from 500 leading companies in leading industries. However, these indices aren’t the market and may not be relevant for the individual investor.

Consider the S&P 500 index. Even though the equities are chosen to represent the U.S. economy, the list isn’t comprehensive. There are more than 5,000 stocks listed on the New York Stock Exchange and the S&P actually tracks only a small percentage of these.

Moreover, the S&P 500 is made up of essentially one asset class: large-capitalization companies. So, if your fund contains small-capitalization stocks, the S&P 500 might not be an accurate gauge of its performance.

In fact, the S&P 500 index isn’t always an accurate gauge even for funds that consist mainly of large-capitalization companies, because it isn’t equally weighted. The largest and often most popular stocks account for the majority of the index’s performance. These popular stocks have a weighting several hundred times that of the less popular stocks.

That doesn’t mean you should ignore the S&P 500 and other indices.

However, to use an index as a pacesetter, you might want to ascertain whether its securities are comparable to those in your fund’s portfolio.