Trading BasicsMar 18, 20266 Min

What Is an Index? And Why Do Most Global ETFs Track One?

To know what's happening in the world markets, you don't have to watch the movement of thousands of individual stocks. Instead, investors employ a standardised approach to measure the performance of a group of assets. This measuring instrument is called an index. An index serves as a performance standard for various sectors of the economy. Whether you are a retail investor or a finance professional, you are probably familiar with names like the S&P 500 or the Nasdaq 100, and these are commonly used indicators of market health. The move towards this data-driven strategy is massive.

By the end of 2025, the amount of passive assets tracking these indexes worldwide exploded to more than $19 trillion, illustrating the scale of global passive investing. Figures are provided for illustrative purposes and may change over time. This blog explains how indices work, why they matter and how access to multiple international markets with platforms such as Dealing.com may connect investors to index-based products across regions.

What Is an Index?

At its heart, a financial index is a statistical tool that is used to measure the performance of a particular market or sector. Instead of tracking every single business in existence, an index tracks a representative "basket" of securities, such as stocks or bonds, as a benchmark.

The main reason for using a benchmark is to offer a point of comparison. For example, if an individual tech stock in your portfolio increases by 5%, this may appear to be a great performance in isolation. However, if the broader technology index has appreciated 20% over the same period, the index shows that your investment is performing below that benchmark. It lets you understand how indexes work and whether your returns are a result of a particular skill or a general movement of the economy. Indexes help investors compare performance, but do not eliminate risk or guarantee returns.

Real-World Index Examples

You'll hear these names in the news on a daily basis. Here is a breakdown of the "Big Three" index examples you need to know:

1. S&P 500 (Standard & Poor's 500)

The S&P 500 is a measure of the performance of the stock market of 500 leading publicly traded companies in the United States. It is a market-capitalisation-weighted index, which means that the larger companies have a more significant impact on its movement. Because it represents some 80% of the market value available, it is widely regarded as a broad representation of large-cap U.S. equities.

• Recent Performance: In 2025, the index came in with a 17.9% return and achieved 39 new all-time highs. Past performance is not indicative of future results.

2. Nasdaq 100

The Nasdaq 100 is a measure of 100 of the largest domestic and international non-financial companies traded on the Nasdaq Stock Market. By strictly excluding the financial sector, it is the ultimate concentrated benchmark for high-growth industries such as Technology, Consumer Services and Biotechnology.

3. Dow Jones Industrial Average (DJIA)

The Dow is a price-weighted index tracking 30 large, "blue-chip" companies based in the US. Unlike the S&P 500, the Dow is weighted by share price, not by the total size of the company. While it is the most historically famous index, many financial professionals see it as being a narrower snapshot of the market since it only represents 30 specific businesses across different industries.

Why Do Global ETFs Track These Indexes?

After you’ve understood ‘what is an index’, you’ll now learn how global ETFs track them. An index is not a tradable security; investors cannot invest directly in it. An index is nothing more than a list, a piece of paper. To actually put money into it you need a vehicle. That vehicle is typically an Exchange Traded Fund (ETF).

An ETF is a fund that is traded on the stock exchange like a stock, but inside, it is comprised of all the companies of a specific index. But why do they "track" them rather than let a human expert pick the stocks?

1. The "Human vs. Math" Problem

Historically, high-paid fund managers have attempted to 'beat the market' by picking winning stocks. Evidence suggests that many active managers underperform their benchmarks over long periods. According to the latest data from S&P Global SPIVA, about 90% of all domestic active managers underperformed their benchmark index over a 10-year period. By just tracking an index, ETFs make sure that you get the "market return" without relying on human judgment, though returns are still subject to market risk.

2. Radical Cost Efficiency

Because an index-tracking ETF is based on an algorithm (rules-based) instead of a room full of expensive analysts, it's incredibly cheap.

• Active Fund Fee: Approximates $66 per $10,000 invested.
• Index ETF Fee: ~$3 for every $10,000 invested.

Over a 20-year period, those savings can mean the difference between retiring in a beach house or a basement. Lower fees can contribute to higher net returns, though investment outcomes are not guaranteed.

3. Instant Diversification

It would be a nightmare of fees and paperwork to buy 500 individual stocks manually. You purchase one share of an S&P 500 ETF and you instantly have a tiny slice of 500 companies. Diversification may reduce the impact of individual company performance, but does not eliminate risk.

Active vs. Passive: The Great Debate

To help you figure out where your money fits, let's see how these two worlds compare in the current 2026 market environment:

These examples are illustrative and not recommendations. Past performance does not predict future results.

Is Indexing Right for You?

Ask yourself these three questions to determine if you are ready to join indexing:

1. Do I have 40 hours a week to spend reading earnings reports?

If the answer is "no," an index fund does the homework for you.

2. Am I okay if "Average" is "Great"?

Remember, "average" market returns have historically trumped most "experts."

3. Is my purpose to get rich quick or stay rich long term?

Indexes are designed for the long haul, with the benefit of compound interest over the decades.

Index Funds to Invest In: How to Start

If you're looking for index funds to invest in, the US market offers some of the most liquid and battle-tested options. As of early 2026, the trend is moving toward "Total Market" funds that capture everything from tech giants to small-town manufacturers.

• For Broad US Exposure: Look for ETFs tracking the S&P 500 (Tickers: VOO, SPY).
• For Tech Enthusiasts: Look for funds tracking the Nasdaq 100 (Ticker: QQQ).
• For a Global "Safety Net": Consider the Vanguard Total International Stock ETF (Ticker: VXUS) to gain broad exposure to non-US developed and emerging markets.

Selection should be based on your individual investment goals, risk tolerance, and financial situation.

Pro Tip: In 2026, keep an eye on 'Fixed Income Indexes.' With the Fed holding interest rates at 3.75%, bond indexes are seeing an 'ETF frenzy' as investors migrate from money markets to lock in intermediate yields.

Market conditions and rates may change over time, affecting performance.

Final Thought on Index Funds to Invest In

An index is essentially the "wisdom of the crowd" translated into a number. By investing in an ETF that tracks one, you aren't just betting on a single company; you’re betting on human ingenuity and the growth of the global economy. In a world where 2026 is seeing record-breaking corporate efficiency, with net profit margins for S&P 500 companies projected to reach an all-time high, sitting on the sidelines is the only guaranteed way to lose. Outcomes depend on market performance, risk tolerance, and investment horizon.

For those exploring global markets, access plays a foundational role. Dealing.com brings multiple exchanges together under one account, covering major US and UK markets at launch, alongside 30K+ assets and fractional investing starting from $1. The platform structure focuses on access and clarity, allowing global indices and the ETFs tracking them to be explored within a unified investing framework. As with any investment decision, outcomes depend on market performance, risk tolerance, and time horizon. Understanding indices is a foundational step in evaluating long-term market participation.

Disclaimer: This content is for educational purposes only and does not constitute investment advice, personal recommendations, or a solicitation to buy or sell financial instruments. All investments involve risk, including potential loss of capital. Investors should consult professional financial advisors and consider their personal circumstances before making any investment decision.