What Is Asset Allocation? How to Think About Dividing Your Portfolio
May 21, 2026
8 min read
What Is a Market Index? How the S&P 500, FTSE 100, and Other Benchmarks Actually Work
The S&P 500 is mentioned constantly — but what actually is it? Understanding market indices helps you read financial news, evaluate your own performance, and make sense of how your portfolio tracker benchmarks your returns.
For educational purposes only. This article is not financial advice. Always consult a qualified financial professional before making investment decisions.
If you spend any time reading about investing, you'll come across market indices almost immediately. The S&P 500 finished the day up 1.2%. The FTSE 100 fell during the quarter. The NASDAQ hit a new high. These names appear everywhere — but what are they, and why do they matter to someone tracking their own portfolio?
This article explains what a market index is, how the major ones are built, and what benchmarking your portfolio against them actually tells you. As always, this is educational content only — not financial advice.
---
What Is a Market Index?
A market index is a way of measuring the performance of a group of investments — usually shares in a collection of companies — as if they were a single combined investment.
Instead of tracking the price of every company individually, an index distils all of that movement into one number. When that number rises, the underlying group of companies has generally risen. When it falls, they've generally fallen.
The index itself isn't something you can buy directly. It's a measuring stick. You invest in funds or ETFs that are designed to track an index — to replicate its performance as closely as possible. But the index is the benchmark, not the investment.
---
How Are Indices Built?
Different indices use different rules to decide which companies are included and how much weight each one gets.
The most common method is market capitalisation weighting. Each company's influence on the index is proportional to its total market value. A company worth £100 billion has ten times more impact on the index than a company worth £10 billion. The largest companies drive the index's movement the most.
This means the S&P 500 isn't really 500 equally important companies. The top ten companies — typically large technology and consumer businesses — often account for 30–35% of the entire index. When Apple, Microsoft, or Amazon has a big day, the index has a big day too.
Some indices use price weighting instead, where a company with a higher share price has more influence regardless of its total size. The Dow Jones Industrial Average (often called "the Dow") works this way. This approach is now considered somewhat arbitrary and is less commonly used for new indices.
Others use equal weighting, where every company contributes equally. An equal-weight version of the S&P 500 gives a £5 billion company the same influence as a £1 trillion one.
---
The Major Indices Worth Knowing
A few appear constantly in financial news and are used as benchmarks by most portfolio trackers:
S&P 500 — tracks 500 large companies listed on US stock exchanges. It's the most widely used benchmark for US equities and is often treated as a proxy for the American economy, though its composition skews towards large multinationals. Created by Standard & Poor's.
FTSE 100 — tracks the 100 largest companies listed on the London Stock Exchange by market capitalisation. It's the primary UK benchmark, though many of its members earn most of their revenue internationally, so it's less of a pure read on the UK economy than it might seem.
FTSE All-Share — a broader UK index covering around 600 companies, including smaller ones that don't make the FTSE 100 cut.
MSCI World — tracks around 1,500 large and mid-size companies across 23 developed countries. It's heavily weighted towards the US (often 60–70% of the index), but gives exposure to Europe, Japan, Australia, and other markets. Commonly used as a benchmark for global equity portfolios.
MSCI Emerging Markets — similar to the MSCI World but covers developing economies like China, India, Brazil, and South Korea. Higher growth potential, higher volatility.
NASDAQ Composite — tracks all companies listed on the NASDAQ exchange, which is heavily weighted towards technology companies. More concentrated and typically more volatile than the S&P 500.
Dow Jones Industrial Average — one of the oldest US indices, tracking just 30 large "blue chip" companies. It's widely reported but less representative of the broad US market than the S&P 500.
---
Why Indices Matter to Everyday Investors
The practical reason market indices matter is benchmarking — comparing your portfolio's performance to a relevant standard to understand whether you're keeping up with the broader market or falling behind it.
If your portfolio returned 6% last year, that number is hard to interpret in isolation. Was that good? If the MSCI World returned 18% over the same period, the answer is less encouraging. If the MSCI World returned 2%, your 6% looks strong.
Benchmarking gives your numbers context. Without a reference point, you're just watching a number change.
The choice of benchmark matters, though. If your portfolio is mostly UK shares, comparing it to the S&P 500 doesn't tell you much. A more relevant comparison would be the FTSE All-Share. If you hold a globally diversified mix, the MSCI World is often a more appropriate yardstick.
---
What an Index Doesn't Tell You
A few things worth being clear about:
An index is not the economy. The S&P 500 measures the market value of 500 large companies. That's related to economic activity — but the relationship is imperfect and often delayed. Stock markets can rise sharply during a recession and fall during economic growth periods.
An index doesn't include dividends by default. When you see the S&P 500 "returned 10% last year," that often refers to price return only — the change in the level of the index. The total return, which includes dividends reinvested, is usually higher. Always check which version is being quoted when comparing numbers.
An index changes over time. Companies are added and removed as their market caps shift. The S&P 500 of 2010 looks quite different from the S&P 500 today. When you invest in an index fund, the fund adjusts with the index automatically — but it means the historical track record of an index reflects a continually updated basket, not the same group of companies throughout.
Past index performance doesn't predict future returns. This is worth repeating: even the most widely used global indices have gone through multi-year periods of flat or negative real returns. Knowing the long-run historical average doesn't tell you what the next decade will bring.
---
How Benchmarking Works in FolioTrack
FolioTrack lets you compare your portfolio's performance against major indices — including the S&P 500, FTSE 100, MSCI World, and others — over the same time period.
This is more useful than it might first appear. It's easy to be satisfied with a 12% return until you realise the relevant index returned 22% over the same period. It's equally easy to be discouraged by a flat year until you see the index was also flat or slightly negative.
Benchmarking doesn't tell you whether your portfolio is well-constructed or whether any given decision was correct. But it does put your returns in the right context — which is a more honest starting point for evaluating how your investments are doing.
The benchmark you choose should reflect what your portfolio is actually invested in. A heavily UK-focused portfolio measured against the MSCI World is comparing apples to oranges. FolioTrack lets you select the most relevant comparison, or run comparisons against multiple indices at once.
---
Index Funds and ETFs: The Connection
Understanding indices helps explain why index funds and ETFs are so widely recommended.
An index fund is simply a fund that aims to replicate an index's performance by holding the same underlying companies in the same proportions. If you invest in an S&P 500 index fund, your money is distributed across the 500 companies in the index, weighted by their market caps, and your returns track the index (minus a small fee).
The appeal is straightforward: instead of trying to pick winning stocks or pay a fund manager to do so, you simply match the market. Over long periods, the majority of actively managed funds have failed to consistently outperform their relevant benchmark index after fees. This is part of what has driven the growth of passive index investing.
We covered ETFs in more depth in a separate article if you want to go further on how they work in practice.
---
A Few Things Worth Remembering
Tracking an index is not the same as investing in the economy. Indices measure listed companies, which represent a subset of economic activity. Private companies, small businesses, and the service sector aren't captured.
You can underperform an index while still making money. A 4% return is a positive outcome. It's only a concern relative to the benchmark if you had a reason to expect more.
Indices are a useful tool for context, not a target you must beat. Many investors are happy tracking the market rather than trying to outperform it — and there's a strong rational case for that approach.
Different indices can give very different pictures of the same period. A year when UK shares fell 5% and global shares rose 10% will look very different depending on which index you're measured against.
Nothing in this article is financial advice. Whether to benchmark your portfolio, which index to compare against, and how to interpret the result in the context of your own goals and situation is something a qualified financial adviser can help you think through.
---
The Short Version
A market index is a measuring tool that tracks the collective performance of a group of investments — usually a basket of company shares — as a single number. The S&P 500, FTSE 100, and MSCI World are the ones you'll encounter most often. Each is built differently and covers different parts of the market. Benchmarking your portfolio against a relevant index puts your returns in context, which is one of the more useful things a portfolio tracker can show you. The index isn't something you invest in directly — it's the standard you compare yourself against.
This article explains what a market index is, how the major ones are built, and what benchmarking your portfolio against them actually tells you. As always, this is educational content only — not financial advice.
---
What Is a Market Index?
A market index is a way of measuring the performance of a group of investments — usually shares in a collection of companies — as if they were a single combined investment.
Instead of tracking the price of every company individually, an index distils all of that movement into one number. When that number rises, the underlying group of companies has generally risen. When it falls, they've generally fallen.
The index itself isn't something you can buy directly. It's a measuring stick. You invest in funds or ETFs that are designed to track an index — to replicate its performance as closely as possible. But the index is the benchmark, not the investment.
---
How Are Indices Built?
Different indices use different rules to decide which companies are included and how much weight each one gets.
The most common method is market capitalisation weighting. Each company's influence on the index is proportional to its total market value. A company worth £100 billion has ten times more impact on the index than a company worth £10 billion. The largest companies drive the index's movement the most.
This means the S&P 500 isn't really 500 equally important companies. The top ten companies — typically large technology and consumer businesses — often account for 30–35% of the entire index. When Apple, Microsoft, or Amazon has a big day, the index has a big day too.
Some indices use price weighting instead, where a company with a higher share price has more influence regardless of its total size. The Dow Jones Industrial Average (often called "the Dow") works this way. This approach is now considered somewhat arbitrary and is less commonly used for new indices.
Others use equal weighting, where every company contributes equally. An equal-weight version of the S&P 500 gives a £5 billion company the same influence as a £1 trillion one.
---
The Major Indices Worth Knowing
A few appear constantly in financial news and are used as benchmarks by most portfolio trackers:
S&P 500 — tracks 500 large companies listed on US stock exchanges. It's the most widely used benchmark for US equities and is often treated as a proxy for the American economy, though its composition skews towards large multinationals. Created by Standard & Poor's.
FTSE 100 — tracks the 100 largest companies listed on the London Stock Exchange by market capitalisation. It's the primary UK benchmark, though many of its members earn most of their revenue internationally, so it's less of a pure read on the UK economy than it might seem.
FTSE All-Share — a broader UK index covering around 600 companies, including smaller ones that don't make the FTSE 100 cut.
MSCI World — tracks around 1,500 large and mid-size companies across 23 developed countries. It's heavily weighted towards the US (often 60–70% of the index), but gives exposure to Europe, Japan, Australia, and other markets. Commonly used as a benchmark for global equity portfolios.
MSCI Emerging Markets — similar to the MSCI World but covers developing economies like China, India, Brazil, and South Korea. Higher growth potential, higher volatility.
NASDAQ Composite — tracks all companies listed on the NASDAQ exchange, which is heavily weighted towards technology companies. More concentrated and typically more volatile than the S&P 500.
Dow Jones Industrial Average — one of the oldest US indices, tracking just 30 large "blue chip" companies. It's widely reported but less representative of the broad US market than the S&P 500.
---
Why Indices Matter to Everyday Investors
The practical reason market indices matter is benchmarking — comparing your portfolio's performance to a relevant standard to understand whether you're keeping up with the broader market or falling behind it.
If your portfolio returned 6% last year, that number is hard to interpret in isolation. Was that good? If the MSCI World returned 18% over the same period, the answer is less encouraging. If the MSCI World returned 2%, your 6% looks strong.
Benchmarking gives your numbers context. Without a reference point, you're just watching a number change.
The choice of benchmark matters, though. If your portfolio is mostly UK shares, comparing it to the S&P 500 doesn't tell you much. A more relevant comparison would be the FTSE All-Share. If you hold a globally diversified mix, the MSCI World is often a more appropriate yardstick.
---
What an Index Doesn't Tell You
A few things worth being clear about:
An index is not the economy. The S&P 500 measures the market value of 500 large companies. That's related to economic activity — but the relationship is imperfect and often delayed. Stock markets can rise sharply during a recession and fall during economic growth periods.
An index doesn't include dividends by default. When you see the S&P 500 "returned 10% last year," that often refers to price return only — the change in the level of the index. The total return, which includes dividends reinvested, is usually higher. Always check which version is being quoted when comparing numbers.
An index changes over time. Companies are added and removed as their market caps shift. The S&P 500 of 2010 looks quite different from the S&P 500 today. When you invest in an index fund, the fund adjusts with the index automatically — but it means the historical track record of an index reflects a continually updated basket, not the same group of companies throughout.
Past index performance doesn't predict future returns. This is worth repeating: even the most widely used global indices have gone through multi-year periods of flat or negative real returns. Knowing the long-run historical average doesn't tell you what the next decade will bring.
---
How Benchmarking Works in FolioTrack
FolioTrack lets you compare your portfolio's performance against major indices — including the S&P 500, FTSE 100, MSCI World, and others — over the same time period.
This is more useful than it might first appear. It's easy to be satisfied with a 12% return until you realise the relevant index returned 22% over the same period. It's equally easy to be discouraged by a flat year until you see the index was also flat or slightly negative.
Benchmarking doesn't tell you whether your portfolio is well-constructed or whether any given decision was correct. But it does put your returns in the right context — which is a more honest starting point for evaluating how your investments are doing.
The benchmark you choose should reflect what your portfolio is actually invested in. A heavily UK-focused portfolio measured against the MSCI World is comparing apples to oranges. FolioTrack lets you select the most relevant comparison, or run comparisons against multiple indices at once.
---
Index Funds and ETFs: The Connection
Understanding indices helps explain why index funds and ETFs are so widely recommended.
An index fund is simply a fund that aims to replicate an index's performance by holding the same underlying companies in the same proportions. If you invest in an S&P 500 index fund, your money is distributed across the 500 companies in the index, weighted by their market caps, and your returns track the index (minus a small fee).
The appeal is straightforward: instead of trying to pick winning stocks or pay a fund manager to do so, you simply match the market. Over long periods, the majority of actively managed funds have failed to consistently outperform their relevant benchmark index after fees. This is part of what has driven the growth of passive index investing.
We covered ETFs in more depth in a separate article if you want to go further on how they work in practice.
---
A Few Things Worth Remembering
Tracking an index is not the same as investing in the economy. Indices measure listed companies, which represent a subset of economic activity. Private companies, small businesses, and the service sector aren't captured.
You can underperform an index while still making money. A 4% return is a positive outcome. It's only a concern relative to the benchmark if you had a reason to expect more.
Indices are a useful tool for context, not a target you must beat. Many investors are happy tracking the market rather than trying to outperform it — and there's a strong rational case for that approach.
Different indices can give very different pictures of the same period. A year when UK shares fell 5% and global shares rose 10% will look very different depending on which index you're measured against.
Nothing in this article is financial advice. Whether to benchmark your portfolio, which index to compare against, and how to interpret the result in the context of your own goals and situation is something a qualified financial adviser can help you think through.
---
The Short Version
A market index is a measuring tool that tracks the collective performance of a group of investments — usually a basket of company shares — as a single number. The S&P 500, FTSE 100, and MSCI World are the ones you'll encounter most often. Each is built differently and covers different parts of the market. Benchmarking your portfolio against a relevant index puts your returns in context, which is one of the more useful things a portfolio tracker can show you. The index isn't something you invest in directly — it's the standard you compare yourself against.
Track Your Portfolio with FolioTrack
See how your investments are really performing with AI-powered insights, index comparisons, and dividend tracking.
Start free 14-day trial