Market Benchmarks

One of the most common ways to evaluate investment performance is to compare performance against the returns of an appropriate market benchmark.

Just like there is no shortage of investment options, there’s also no shortage of market benchmarks which can lead to a lot of confusion.  So, what are the best market benchmarks to use? Here’s some suggestions.

Canadian Equity Benchmarks

The most common benchmark used for Canadian equities is the S&P/TSX Composite Index.  This index tracks large, mid, and small company stocks. At one time, the benchmark used was the TSE300, which was an index, comprise of exactly 300 companies.  Now the TSX Composite index is controlled by Standard and Poors and the stocks included in the index can change at any time at the discretion of Standard and Poors.  Generally, the TSX Composite covers about 70% of the market capitalization of all companies listed on the TSX exchange.

The S&P/TSX 60 is another index used to benchmark against large cap companies.  It is comprise of 60 large cap companies.

The S&P/TSX Small Cap index is used to track small cap stocks in Canada.

Global Equity Benchmarks

US Equities – the Russell 3000 Index tracks large, mid, and small company stocks in the US.  Many industry professionals believe it is most accurate at benchmarking portfolios that hold their U.S. stocks in RRSPs (where the 15% withholding tax does not apply).  Other commonly used US equity indices include the S&P500 and the Dow Jones Industrial Index (DJIA).

The Dow Jones Industrial Average (DJIA) tracks 30 large-capitalization stocks that trade on the New York Stock Exchange. It is not an index but an average. The calculation is done by adding the prices of each of the 30 issues in the index and dividing by a number periodically adjusted for stock splits. Because it is an average, a stock that sells for a higher price has a greater effect than a lower-priced stock. It is criticized because few companies are included, not every new industry is represented, and its method of calculation is weighted by price. Nevertheless, it is the index, which significant attention.

The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index (stock price times number of shares outstanding), with each stock’s weight in the Index proportionate to its market value. The “500” is one of the most widely used benchmarks of U.S. equity performance because it consists of stock traded on the NYSE, AMEX and NASDAQ. The S&P 500 is a changing index based on a number of criteria set by Standard and Poors. For more information visit the Standard and Poors Website.

The Russell 2000 Small Cap is used to track small cap stocks in the US.

Global Equities – Global equity benchmarks gets a bit tricky because there are so many different variations and options to choose from.  Here are some of the more common indices:

  • MSCI World Index (net div.) (in CAD).  Tracks large and mid company stocks in developed markets around the world.  This index is most often use to benchmark against Global equities (includes Canada and US).
  • MSCI EAFE Index (net div.).  This index tracks large and mid company stocks in developed markets but does not include US and Canada.  It’s a subtle distinction but this index is often used for international equities (no US and Canada).
  • MSCI (Morgan Stanley) MSCI is proud of its reputation as a pioneer in the index and risk management space.  When it comes to global and international indices, MSCI indices were launched over 40 years ago and today they include numerous regional and sector indices.  Other world benchmarks include the the FTSE 100 (London), DAX (German), NIKKI (Japan) to name a few. For a comprehensive list of MSCI indexes visit the MSCI website.

Bond Benchmarks

The best know bond indices for Canadian Bonds are the DEX indices. The best known of these indices is the DEX Universe Bond Index, which tracks the broad Canadian bond market.

In addition to the Universe, there are a variety of sub-indices for different term and credit sectors, as well as indices for tracking other segments of the market:

  • Short Term:  DEX Short Term Bond Index
  • Mid Term:  DEX Universe Bond Index
  • Long Term:  DEX Long Term Bond Index
  • Real Return Bonds:  DEX Real Return Bond Index
  • Cash – DEX 30 Day T-Bill Index

Other Benchmarks

When it comes to tracking market benchmarks, one of my favourite resources comes from PWL Capital.  They provide a monthly statistics report for all of the market benchmarks above plus some others:

  • Canadian Real Estate Investment Trusts (REITs):  S&P/TSX Capped REIT Index
  • Global REITs:  S&P Global REIT Index (in CAD)
  • Canadian Dividend Stocks:  BMO Preferred Shares

Using investment benchmarks

Justin Bender from PWL Captial was also kind enough to provide some thoughts on the merits of investors using these benchmarks to understand how their investment portfolios are doing:

  • Market Benchmarks allow investors to make informed decisions regarding active versus passive alternatives.
  • Investors can better understand where their rates of return are coming from.
  • Ensures advisors/investors are accountable for their investment decisions

Justin also provided a few thoughts on the shortcomings of using market benchmarks:

  • Benchmark performance data does not account for the risk taken to generate the returns.
  • Strategic asset mixes change over-time – this can cause distortions in benchmarking if not done properly.
  • Benchmarks do not allow a comparison of after-tax rates of return.
  • Does not consider other value-add services received from the advisor.

While there are many other market benchmarks around the world, remember benchmarks are designed to give a general snapshot of market and investment performance. Many investors and professional managers will use these benchmarks to judge their performance. Benchmarks can be used to evaluate the performance of your individual investments but remember these numbers can also be very misleading. It is always wise to consult your investment adviser before making any investment conclusions.

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace. For more information you can follow him on Twitter @JimYih or visit his other websites Group Benefits Online and Advisor Think Box.

One Response to Market Benchmarks

  1. It is important also to create your own custom benchmark based on your target strategic asset allocation. The benchmarks alone only tell you how your individual asset class performance is doing. However, if you are getting return figures from your advisor, should you be so lucky, then you are probably getting an overall return on the portfolio. In order to know if you are doing well then, you need an overall portfolio benchmark performance number to compare it with.

    So you need to create a ‘weighted’ total portfolio benchmark return based upon your target allocation.

    Hey Jim, how do you feel about an article and maybe a spreadsheet for your readers on how to do this??

    Great posting, thanks….

    Neil

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