Market Vista



Leading Benchmarks and Index Funds

Despite the huge strides in globalization over the past century and more, the world is far from being a homogeneous place. From an economic slant, the variations across the planet show up in the motley patterns of production and consumption as well as business and finance.

Since the 20th century, the United States has played a dominant role in the global marketplace. Even today, the domestic economy continues to grow at a measured pace in terms of the absolute level of production.

On the other hand, the share of world output claimed by the U.S. has been shrinking for half a century. The reason, of course, is that the budding nations have been blooming faster than the mature giant.

In spite of the dwindling lead, though, the U.S. still retains the top spot in terms of economic output as well as financial clout. For this reason, the nation continues to take center stage in global affairs. As an example, the America economy serves as the bellwether for the rest of the world.

Admittedly, a bombshell in some other country can upset the U.S. in turn. A case in point is a terrorist attack in Britain or a devastating quake in Japan.

Although the links happen to be bilateral, the usual mode of influence lies in the outward direction from America to everwhere else. As an example, the financial bazaar in the U.S. tends to lead the markets on foreign shores rather than the other way round. In this way, the colossus is more likely than not to set the tone for the rest of the planet.

If the stock market in America enjoys an upsurge, for instance, then the bourses round the globe are prone to follow suit. The story is similar in the opposite heading when the U.S. leads a charge to the downside.

Given this backdrop, the worldly investor keeps tabs on the goings-on in America even if their main interest lies elsewhere. Put another way, an adept actor based abroad has to monitor at least a couple of markets: the U.S. as well as their own.

In an interdependent world, a lucid program of investment requires a coherent view of the marketplace round the globe. To this end, the deft investor keeps tabs on a raft of geographic regions as well as asset classes.

In this effort, a roll call of the leading benchmarks is a direct way to take the pulse of world markets. Meanwhile, an indirect mode involves a roster of index funds designed to get a reading on the whole shebang.

Since the turn of the millennium, the parade of index funds coming on stream has been a godsend for the investing public. For each of the communal pools, the objective is to match the performance of a specific benchmark of the marketplace.

On one hand, an index fund offers the investor nothing more than the opportunity to match a market yardstick to a fair degree of accuracy. As a result, a punter bent on beating the benchmarks has no use for such a vehicle.

On the upside, though, keeping up with an index – or not lagging it by a big gap – is more of a feat than the bulk of investors can muster. In fact, the usual lot of the investing public is to trail the yardsticks by a goodly amount.

Within the sphere of index funds, a convenient form lies in a vehicle whose shares are traded on a stock exchange. This type of security is known by the clunky term of exchange traded fund, or more tersely as an ETF.

An index fund of any type, properly designed, will closely mirror the behavior of a target benchmark. In this way, the investor can readily duplicate the movements of the standard bearer.

By contrast, a gamester who replicates the same yardstick on their own – by buying and selling the constituent securities covered by the benchmark – is likely to incur a sizable toll. In tracking the index, one of the burdens lies in the time required to monitor the changes in composition of the target index. A second millstone is the drain of transaction costs in darting in and out of the market in order to update the portfolio on an ongoing basis.

A key attraction of an ETF stems from the fact that it is a tradeable instrument. As a counterexample, there is no simple way for the average punter to invest in the commodity sector as a whole. By turning to an index fund, though, the task is as easy as buying the shares of a single security.

In addition, an exchange traded fund can provide a wealth of information for the investing public in a convenient format. For instance, the volume of trading on an ETF dealing with emerging markets is a measure of interest in the domain amongst the throng of international investors.

As in any portion of the marketplace, the popularity of the sprouting regions will wax and wane over time. The shifting levels of engagement can in turn provide a savvy investor with useful hints on the prospects for the market over the months and years to come.

In short, the volume of transactions on an index fund is a measure of participation by the international crowd. Despite its significance, though, this sort of information cannot be obtained readily by the bulk of investors by simply tracking the individual benchmarks of the respective countries.

For a variety of reasons, then, a phalanx of exchange traded funds is a dandy way to keep track of the global marketplace. In this light, the major types of assets span the gamut from stocks and commodities to currencies and realty. The big picture of world markets can be grasped in a flash through a gallery of compact charts covering the leading benchmarks and index funds.