An index is a method to track the performance of some group of assets in a standardized way. Indexes typically measure the performance of a basket of securities intended to replicate a certain area of the market. These may be broad-based to capture the entire market such as the Standard & Poor’s 500 (S&P 500) or Dow Jones Industrial Average (DJIA), or more specialized such as indexes that track a particular industry or segment. Indexes are also created to measure other financial or economic data such as interest rates, inflation, or manufacturing output.
Often, indices serve as benchmarks against which to evaluate the performance of a portfolio’s returns. One popular investment strategy, known as indexing, is to try to replicate such an index in a passive manner rather than trying to outperform it.