Q&A with Apricot | How are passive investors using market indices ?

In recent years, passive investing has become increasingly popular. Many investors prefer to follow the overall movement of the market rather than burden themselves with the work of selecting individual stocks. Market indices play a key role in this approach. In this article, we will discuss what indices are and how they are used by passive investors.

What is a market index?

A market index measures the performance of a specific segment or sector of the market. Imagine a selected group of stocks whose combined performance provides a snapshot of the overall health and direction of that part of the market.

Some of the most well-known indices include:

• S&P 500 | Tracks the performance of 500 large U.S. companies, representing about 80% of the total U.S. stock market capitalization.
• Nasdaq 100 | Includes 100 of the largest non-financial companies listed on the Nasdaq exchange, mostly in the technology sector.
• Dow Jones Industrial Average (DJIA) | Tracks the performance of 30 large, established U.S. companies.
• FTSE 100 | Tracks the 100 largest companies listed on the London Stock Exchange.
• Euro Stoxx 50 | Represents the performance of 50 leading companies in the Eurozone.
• DAX 40 | Tracks 40 of Germany’s largest companies listed on the Frankfurt Stock Exchange.
• CAC 40 | Tracks the 40 largest companies listed on the Paris Stock Exchange.

These indices help investors monitor the performance of an entire market or a specific segment of it.

Why and how do passive investors use indices?

Passive investors don’t want to constantly track news, reports, or choose individual stocks. Instead, they aim to earn passive income by replicating the overall market return.

The most common way to make such passive investments is by investing in index-tracking ETFs. These funds are managed by professionals who construct a portfolio that closely mirrors the composition and movement of the chosen index. As a result, passive investors capture the market’s average return without spending excessive time or effort.

Advantages

• Simplicity | The investor doesn’t try to predict the performance of individual companies. Instead, they invest in the index as a whole.
• Low costs | Index-tracking ETFs include a management fee, which is usually low, typically between 0.02% and 1%.
• Diversification | Market indices include dozens or even hundreds of companies from different sectors. This reduces risk: if one company’s stock price falls, the performance of other companies can help balance the loss.

Example

Suppose an investor wants to follow the overall U.S. market movement. Instead of buying shares of 500 different companies, they can simply purchase an ETF that tracks the S&P 500 (for example, SPY*, VOO*, IVV*, etc.). The value of these ETFs moves in the same direction as the index itself.

This gives the investor an opportunity to invest in the entire U.S. market at a low cost.

To learn more about ETFs, you can listen to our podcast episode dedicated to ETFs.

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It’s important to remember that investments are subject to market fluctuations and carry inherent risks. Consider your financial goals and risk tolerance before investing.

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*The examples in this text are for illustrative purposes only. This does not constitute investment advice or a recommendation to buy or sell any specific investment instrument. The past performance mentioned in this text is not indicative of future results.