We've all heard of index fingers and index cards, and know what the index at the back of a book is used for. Indexes are also commonly used as a barometer to measure performance from a given benchmark. These days it seems there is an index for just about everything from the People-Snowed-In Index, which counts the number of people who are not at work due to bad weather to the Mamma's Boy Index, which tracks the number of 25 to 34 year-old males living with their parents.  

But just what does it mean when we talk about a stock index or index funds?

A stock index follows the market prices of a particular group of stocks. For example, it could be a committee-selected group of 500 of the largest firms in the U.S. (the S&P 500 Index) or a price-weighted selection of 30 blue-chip industrial companies (the Dow Jones Industrial Average). There are also indexes that follow movement of stock prices in specific sectors (real estate, health care/pharmaceutical, precious metals) or changes in the stocks of various countries or global regions (the MSCI EAFE which follows Europe, Australasia and the Far East or the S&P Latin America 40, to name a couple).

Index funds are mutual funds designed to track a specific index - owning the same stock holdings in the same weighting as the index itself. The benefits of owning index funds are their low management costs and generally low taxable distributions. Note that if the particular asset fluctuates in value, the index fund's value will fluctuate as well. Also with an index fund, there is little possibility of outperforming the market - the investor will likely receive a return that closely matches the benchmark being followed.

Wall Street will continue to debate the benefits of active versus passive (using index funds) investment management, and we're sure that from time to time, one approach will be more popular than the other. At JBA, our aim is to use active funds that have provided consistently above-average returns at below-average costs. If you have questions about your specific portfolio and why you own (or don't own) certain investments, please be sure to ask your planner.