The equity market indices can be broadly classified into the following categories:
a. Broad Market Indices. These are the indices that represent more than 90% of the selected market. For example, Russell 3000 represents 99% of the market cap of the US equity market.
b. Multi-Market Indices. The multi-market indices consist of security market indices from different countries, national markets, economic development groups, etc. weighted differently.
c. Sector Index. The sector indices represent a particular sector such as FMGC, utilities, mining, energy, healthcare, etc. There are mainly ten broad sectors for which the indices are created.
These indices help in assessing the manager’s performance, by identifying the managers who have outperformed in an underperforming sector and those who have underperformed in an outperforming sector. These indices also help in identifying whether the returns are due to the stock-picking or sector allocation.
d. Style Indices. A style index is a fundamentally weighted index that provides a benchmark for a particular type of strategy. The style indices are mainly made for the value versus growth strategies. Whether a company is a growth company or a value company depends upon its P/E ratio, and these P/E ratios are subject to changes. These indices require more frequent rebalancing and reconstitution.