What is an Index?

Investors have benefited tremendously from the growth and evolution of indices, and their use in performance management can keep active managers honest

Ben Johnson, CFA 24 January, 2019 | 6:00PM

Indices are meant to be measuring sticks. They give us a sense of where markets have been and where they stand today. The original stock market indices did exactly that. Charles Dow, co-founder of Dow Jones & Co., first published an index of 11 stocks – nine of which were railroad companies – in 1884. The index was a measure of the stock price performance of the firms that formed the foundation of the U.S. economy at that time.

Fast forward nearly 135 years and a lot has changed. Dow's first index was a flop. His next was a hit. The Dow Jones Industrial Average, launched in 1896, still occupies prime real estate on the masthead of The Wall Street Journal.

According to the Index Industry Association, there are now more than 3.7 million indices. This figure is often used as evidence that indexing has run amok. Far more meaningful is how we've arrived at that 3.7 million number. The 100-plus years it took to get from a single index to nearly 4 million have been marked by significant evolution in the realm of indexing.

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About Author

Ben Johnson, CFA

Ben Johnson, CFA  Ben Johnson, CFA, is director of global ETF research for Morningstar and editor of Morningstar ETFInvestor, a monthly newsletter.