What is a market index?
A market index is a hypothetical portfolio of securities which represent a financial market.
A market index is a hypothetical portfolio of investments (such as bonds and shares) which represents a financial market. There are thousands of indices around the world which track all sorts of markets. The index value is calculated as the weighted sum of the prices of the underlying holdings. The method of weighting varies from one index to the other but generally, they are weighted by their market value.
Investors follow market indexes to gauge market returns and compare how their portfolio has performed in relation to the market.
The most widely followed index for the NZ share market is the NZX 50 Gross Index. It is a hypothetical portfolio of the 50 largest companies weighed by their free-float market value. By free float, we mean that the index only takes into account the number of shares which are available for trading. Because dividends are such a large part of share returns in NZ, the index also takes dividends into account.
For US shares, the main index is the S&P 500, an index of the largest 500 US companies. However, dividends are not taken into account. This means that an investor who is looking to calculate the overall return needs to add dividends to the performance of the S&P 500.
Indices are used for several purposes:
- As a benchmark for investors and fund managers to compare their performance with the market generally. You will see that all KiwiSaver providers compare their performance to these benchmarks.
- As a portfolio for passive investment managers to replicate. These managers will have portfolios which track the market closely and will charge very low fees because they don’t have to pay for expensive fund managers.
kōura has invested your money in passive investment funds which track specific equity indices which take ESG factors into consideration. These indices are developed and maintained by MSCI, the largest index provider in the world.
For our NZ Equities Fund, kōura has elected to track the Morningstar NZ Equity Index which tracks the top 40 NZ Equities. We have however capped the weights of any individual company to 7% in order to reduce the exposure of the portfolio to any individual share.