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Can you benchmark an index against another index?

Updated: 9/25/2023
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Ailsajack

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9y ago

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Investors use an index as a point of reference to compare how well their investments are doing. For example, an investor holding individual common stocks can compare his performance to a wide based benchmark index such as the S&P 500. An investor can also benchmark one index against another to compare relative performance of a specific Stock Market sector. For example, a benchmark index for gold can be compared to a benchmark index for oil or real estate to evaluate the relative performance return of each sector.

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Q: Can you benchmark an index against another index?
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What is the benchmark?

A benchmark is a standard or point of reference used for evaluating or comparing the performance of something. In investing, a benchmark is typically an index that represents a particular market or asset class against which the performance of a portfolio or investment can be measured.


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What is market benchmark?

A Market Benchmark is a comparative average used when comparing the performance or volatility of a specific financial instrument. The benchmark used will vary depending on the instrument you're comparing. For example, when looking at the relative performance of stocks, you could use a stock index as the benchmark, such as the S&P500 or the Dow Jones Industrial Average. You could also use a Sector Index (such as the Banking Index) if comparing a bank stock. The benchmark shows you how all instruments included in the index faired on average. You can then use that as a comparison. For example, if the benchmark index made 10% per annum, and the stock you're comparing made 20% per annum, you could say that the stock out-performed the benchmark 2 to1.


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Index funds are designed to track a specific benchmark. The benchmarks are often widely published, rebalance annually (also known as reconstitution), and focus on a specific section of the marketplace. Index funds are designed to be low-cost, transparent and come close to the performance of the benchmark (less expenses).


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