what is indexing 
indexing broadly refers to the use of some benchmark indicator or measure as a reference or yardstick in finance and economics indexing is used as a statistical measure for tracking economic data such as inflation unemployment gross domestic product gdp growth productivity and market returns indexing may also refer to passive investment strategies that replicate benchmark indexes index investing has become increasingly popular over the past decades understanding indexingindexing is used in the financial market as a statistical measure for tracking economic data indexes created by economists provide some of the market s leading indicators for economic trends economic indexes closely followed in the financial markets include the purchasing managers index pmi the institute for supply management s manufacturing index ism and the composite index of leading economic indicators these indexes are tracked to measure changes over time statistical indexes may also be used as a gauge for linking values the cost of living adjustment cola is a statistical measure obtained through analysis of the consumer price index cpi that indexes prices to inflation 1 many pension plans and insurance policies use cola and the consumer price index as a measure for retirement benefit payout adjustments with the adjustment using inflation based indexing measures indexing in financial marketsan index is a method to track the performance of a 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 could be a broad based index that captures the entire market such as the standard poor s 500 index or dow jones industrial average djia indexes can also be more specialized such as indexes that track a particular industry or segment the dow jones industrial average is a price weighted index which means it gives greater weight to stocks in the index with a higher price the s p 500 index is a market capitalization weighted index which means it gives greater weight to stocks in the s p 500 index with a higher market capitalization 2index providers have numerous methodologies for constructing investment market indexes investors and market participants use these indexes as benchmarks on performance if a fund manager is underperforming the s p 500 over the long term for example it will be hard to entice investors into the fund indexes also exist that track bond markets commodities and derivatives indexing and passive investingindexing is broadly known in the investment industry as a passive investment strategy for gaining targeted exposure to a specified market segment the majority of active investment managers typically do not consistently beat index benchmarks moreover investing in a targeted segment of the market for capital appreciation or as a long term investment can be expensive given the trading costs associated with buying individual securities therefore indexing is a popular option for many investors an investor can achieve the same risk and return of a target index by investing in an index fund most index funds have low expense ratios and work well in a passively managed portfolio 3 index funds can be constructed using individual stocks and bonds to replicate the target indexes they can also be managed as a fund of funds with mutual funds or exchange traded funds as their base holdings most brokerages will offer index funds that are benchmarked against the major stock market indexes these can be mutual funds or exchange traded funds since index investing takes a passive approach index funds usually have lower management fees and expense ratios ers than actively managed funds the simplicity of tracking the market without a portfolio manager allows providers to maintain modest fees index funds also tend to be more tax efficient than active funds because they make less frequent trades indexing and tracker fundsmore complex indexing strategies may seek to replicate the holdings and returns of a customized index customized index tracking funds have evolved as a low cost investment option for investing in a screened subset of securities tracking funds are based on a range of filters including these tracker funds are essentially trying to take the best of the best within a category of stocks for example a fund may pull from the best energy companies within the broader indexes that track the energy industry 