Every day, it seems, brings a new suite of stock indexes designed to track the overall market, a general class of stocks, or a sector so small that it may only include a handful of companies.
On Monday, Standard & Poor's, known for its benchmark S&P 500 index, announced the creation of 15 new indexes, each designed to track a smaller piece of the overall stock market. They include the Oil & Gas Equipment & Services index, the Health Care Equipment index, the Leisure Time index and the Outsourcing & IT Consulting index, among others.
Why the surge in the number of indexes? Exchange-traded funds, or ETFs.
"The proliferation of indexes is more about offering different perspectives and specific narrow slices of the market," said Srikant Dash, index strategist for S&P. "This allows people a ready way to invest in areas they're interested in, based on these indexes."
ETFs work like mutual funds, in that each share represents ownership in a larger basket of stocks. Unlike mutual funds, however, which include minimum deposits and are only priced once per day, ETFs trade like stocks -- investors can buy any number of shares, and sell at any time.
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In order for investors to have an easy handle on what an ETF is invested in, they're benchmarked against indexes. And given that ETF assets under management have grown by 450 percent since 2000, S&P, Russell Investment Group and others have been asked to create entire suites of index products to attract new ETF investors.
"ETFs have given us a whole new set of ideas on what indexes can do," said Kelly Haughton, founder and strategic director of Russell Indexes, which include the Russell 2000 small-cap stock index.
"If you buy the Russell 2000 iShares ETF, for example, you have instant and manageable exposure to small-caps in a way you couldn't have if you bought the component stocks."
Of course, since the indexers are paid to create new indexes by the ETF companies, the proliferation of indexes -- even ones that nearly overlap -- will continue.
But there's a second reason for all of the new stock indexes to be released in recent years. Companies are trying to become the next Dow Jones & Co., hoping to build a better index that will more accurately reflect the market than the 30-stock Dow Jones industrial average.
While the general public looks to the Dow for their take on Wall Street, professional investors use the S&P 500 for large-caps, and the Wilshire 5000 or Russell 3000 for a more comprehensive view of the market.
"I like to say that the Russell 3000 is 100 times better than the Dow," Haughton joked.
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