Types of Equity Indices

Types of equity indices include broad market, multi-market, sector, and style indices.

1. Broad Market Indices: typically represents more than 90% of a selected market. Common US broad market indices include the Wilshire 5000 or Russell 3000.
2. Multi-market Indices: usually comprise indices from different countries and are designed to represent multiple security markets, useful for investors taking a global approach to equity investing. For example, the S&P Global 1200 is constructed as a composite of 7 headline indices, many of which are accepted leaders in their regions. These include the S&P 500® (US), S&P Europe 350, S&P TOPIX 150 (Japan), S&P/TSX 60 (Canada), S&P/ASX All Australian 50, S&P Asia 50, and S&P Latin America 40.
3. Sector Indices: represent and track different economic sectors on a national, regional, or global basis. Sector indices are helpful for investors wanting more exposure to certain sectors and to help determine if an active manager’s performance is based on stock selection or sector allocation. The S&P Health Care Sector Index would be, as the name suggests, an example of a sector index.
4. Style Indices: represent groups of securities classified according to market capitalization, value, growth, or a combination of these characteristics. Large-cap, mid-cap, and small-cap equities can be further classified as value, growth, or blend (a combination of the two). The Russell 3000 Growth Index would be an example of a style index.

Question

A general emerging markets equity index fund likely tracks what type of index?

1. A style index.
2. A multi-market index.
3. A broad market index.

Solution

The correct answer is B.

Broad market indices mostly refer to those that represent a large proportion of a market within a given country, and style indices are only appropriate for index funds with a deliberate style-tilt. Since emerging markets equity funds span across different countries, it would be sensible for this index fund to follow a multi-market index.