• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer

SuperGuide

Superannuation and retirement planning information

  • SuperGuide Premium
  • Account
  • Log In
  • SuperGuide Premium
  • Account
  • Log In
  • How super works
    • Super for beginners
    • Super rules
    • Employers guide to super
    • Super contributions
    • Super and tax
    • Accessing super
    • Super news
    • Women and super
    • Super tips and strategies
    • How-to guides
    • Super quizzes
    • Superannuation Q&As
    • Superannuation glossary
  • Super funds
    • Best performing super funds
    • Super fund rankings
    • Best performing pension funds
    • Pension fund rankings
    • Super fund average returns
    • Super investing strategies
    • Comparing super funds
    • Choosing a super fund
    • Choosing an investment option
    • Super fund fees
    • Insurance and super
    • Super fund profiles
  • SMSFs
    • SMSFs for beginners
    • SMSF administration
    • SMSF checklists
    • SMSF compliance
    • SMSF investing
    • SMSF pensions
    • SMSF strategies
    • SMSF Q&As
  • Plan your retirement
    • Retirement planning for beginners
    • When should I retire?
    • How long will I live?
    • How much super do I need?
    • Will I get the Age Pension?
    • How much will I spend in retirement?
    • Financial advice
    • Retiring overseas
    • Preparing for retirement
    • Retirement planning strategies
    • Retirement calculators and reckoners
  • In retirement
    • Income in retirement
    • Super lump sums
    • Super pensions
    • Age Pension
    • Working in retirement
    • Life in retirement
    • Senior concessions and services
    • Aged care
    • Estate planning
    • Super death benefits

Home / Super funds / Super investing strategies / Investment indexes: 5 reasons they matter for your super

Investment indexes: 5 reasons they matter for your super

October 1, 2019 by Janine Mace Leave a Comment

Reading time: 3 minutes

On this page

  • A simple guide to investment indexes
  • What investment indexes are available?
  • How indexes work
  • 5 reasons indexes matter for your super
  • Indexes: what they tell you about super fund performance

When it comes to the investment performance of your super account, funds love to talk about how much they have outperformed the index or benchmark.

But what does that really mean? And what the heck is an investment index anyhow?

To help you cut through the jargon, here’s an uncomplicated explanation of investment indexes and why they can be useful tools for learning a little more about the performance of your super account.

A simple guide to investment indexes

For investors, an investment index is like a ruler or a tape measure. It’s a simple tool for measuring the performance – or price movements – of investment securities like shares and bonds.

Indexes are created to make it easier to monitor the performance of a particular investment market. They also represent the universe of assets in a particular market from which an investor can choose.

Investment indexes are the foundation for investments vehicles like exchange-traded funds (ETFs), which allow you to buy a single investment that tracks the performance of an entire market.

Are you with a top performing super fund?

Click here to compare more than 90 Australian super funds, including returns, fees, features, awards and more.

For more information, read SuperGuide articles ETFs: How do I use them and what do they cost? and SMSF investment: 20 most popular ETFs

What investment indexes are available?

There are thousands of different indexes, each representing all or part of a particular investment market.

Each index groups together similar assets. It can cover the industry companies belong to, different sized companies, or the region in which a company is based.

A simple example is a share market index like the S&P/ASX 300 Index, which measures the performance of a basket of securities consisting of 300 companies listed on the Australian Securities Exchange (ASX).

Investment indexes also track the performance of specific market sectors (such as financial, resources and technology companies) and asset classes (such as bonds, commodities, cash or fixed interest).


Good to know

Share market indices can be calculated using a:

  1. Capital index: These indexes track the total market value of the companies within that index. They do not include the dividends shareholders receive, even though these can contribute significantly to the overall performance of share investments.
  2. Accumulation index: These indexes are calculated as if the dividends paid by each company are re-invested back into the company. They measure compound returns.

How indexes work

Investment indexes are generally created by huge investment firms like Bloomberg and Standard & Poor’s, which calculate and monitor the price of the selected group of investment securities. 

The changing price of the assets in the index determines its value. As the prices of the assets go up and down, the value of the index follows.

Compare super funds

Read more...

Advertisement

Good to know

Indexes are used by investment managers to invest in different ways.

  • Passive investing (or indexing) – This style of investing uses index funds, which are based on a specific index. The index fund invests in all or most of the securities in the particular index to provide diversification and lower investment risk.
  • Active investing – This style of investing tries to outperform the market index by choosing a selection of securities the investment manager believes will outperform the index or benchmark. These investment funds tend to hold fewer investment securities than index managers.

5 reasons indexes matter for your super

Investment indexes can provide valuable information to super fund members:

1. Monitoring investment options

Indexes make it easier to monitor the performance of your chosen investment option. Every investment option has a particular benchmark against which the fund trustee measures the performance of the investment manager.

The index will vary depending on the investment option. For Australian shares the benchmark could be the S&P/ASX 300 Accumulation Index, while for International shares it is often the MSCI All Country World Index. Cash investment options are often measured against the Bloomberg AusBond Bank Bill Index.

Investment indexes help you compare ‘apples with apples’. Unless you know the investment index your super fund is aiming to match or beat, you cannot accurately compare its investment performance with another super fund.

For more information, read SuperGuide articles How to compare super funds in 7 easy steps and Super fund performance: Latest annual returns.


Need to know

When your super fund trustee talks about your investment option ‘outperforming’ during a given time period, it is talking about how the investment option has performed against its benchmark – not the broader investment market.


2. Insights into investor sentiment

Indexes provide information about changes in investors’ feelings towards a particular market. When investors are feeling positive about individual market sectors or countries, demand for securities in that market go up and prices rise, so the index also goes up.

For super funds, these insights help fund trustees decide if they need to shift their current allocation of investment assets between different asset classes in the hope of delivering higher investment returns to fund members.

Advertisement

3. Passive investment

Investment managers who use a passive or index style, use indexes as a tool to diversify their portfolio and to deliver the performance of a selected market. They do this by investing in all or a representative sample of the securities in the relevant index.

Super funds often use passive investing as a cost-effective way to buy an entire market or a representative sample of it. This means fund members receive a similar investment return to the relevant market – at a lower cost.

4. Sorting assets

Most investment markets consist of thousands of individual securities from which your super fund’s investment managers can choose. Indexes can be a useful tool to help sort between all these different assets.

When it is being constructed, an index classifies shares (and other types of assets) based on characteristics like the size, sector or industry in which the company operates. Super funds use this information to help with the selection of their investment assets.

5. Representing the market

An investment index is considered to be a broad representation or proxy for the entire investment market (or market segment) they are constructed to track. For example, the Dow Jones Index in the US tracks just 30 large industrial companies, but is viewed as a representation of how the US share market as a whole is performing. Similarly, the US Aggregate Bond Market Index serves as a popular proxy for the enormous US bond market.

By aiming to match or beat the performance of an index, super funds can ensure they are delivering the same performance as the underlying investment market to members.


Advertisement

For more information on the performance of individual asset sectors, try SuperGuide’s Asset Sector Performance Reckoner tool.

Indexes: what they tell you about super fund performance

Sometimes it can be hard to know how well your investments or super fund are performing. That’s where an investment index can come in handy.

If your investment option delivered a similar performance to its investment benchmark, your super fund – and its investment managers – have done their job. If it has outperformed the index it’s a great result and you should be very pleased.

But if your investment option underperforms the relevant index by a large margin for several years, it might be time to ask some questions or consider switching investment option. Every portfolio will have years where it underperforms, but if it lags its benchmark for multiple years, there may be problems.

For more information, read SuperGuide article Super investing: How to change your investment option.

Are you with a top performing super fund?

Click here to compare more than 90 Australian super funds, including returns, fees, features, awards and more.

Learn more about super investing strategies in the following SuperGuide articles:

Super investing for beginners

October 1, 2020

How investing in infrastructure boosts your super account

January 14, 2020

How to change your investment option: 6 points to check before you switch

January 1, 2020

What are listed and unlisted investments and why does it matter?

December 16, 2019

How to grow your super: Know your risk profile

December 1, 2019

Why big super funds diversify and what you can learn from it

September 17, 2019

Related topics

Super funds Super investing strategies

Related features

Types of investments for superannuation

IMPORTANT: All information on SuperGuide is general in nature only and does not take into account your personal objectives, financial situation or needs. You should consider whether any information on SuperGuide is appropriate to you before acting on it. If SuperGuide refers to a financial product you should obtain the relevant product disclosure statement (PDS) or seek personal financial advice before making any investment decisions. Comments provided by readers that may include information relating to tax, superannuation or other rules cannot be relied upon as advice. SuperGuide does not verify the information provided within comments from readers. Learn more

© Copyright SuperGuide 2009-21. Copyright for this article belongs to SuperGuide Pty Ltd, and cannot be reproduced without express and specific consent. Learn more

Reader Interactions

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Primary Sidebar

How super works
Super for beginners
Super rules
Employers guide to super
Super contributions
Super and tax
Accessing super
Super news
Women and super
Super tips and strategies
How-to guides
Super quizzes
Superannuation Q&As
Superannuation glossary
Super funds
Best performing super funds
Super fund rankings
Best performing pension funds
Pension fund rankings
Super fund average returns
Super investing strategies
Comparing super funds
Choosing a super fund
Choosing an investment option
Super fund fees
Insurance and super
Super fund profiles
SMSFs
SMSFs for beginners
SMSF administration
SMSF checklists
SMSF compliance
SMSF investing
SMSF pensions
SMSF strategies
SMSF Q&As
Plan your retirement
Retirement planning for beginners
When should I retire?
How long will I live?
How much super do I need?
Will I get the Age Pension?
How much will I spend in retirement?
Financial advice
Retiring overseas
Preparing for retirement
Retirement planning strategies
Retirement calculators and reckoners
In retirement
Income in retirement
Super lump sums
Super pensions
Age Pension
Working in retirement
Life in retirement
Senior concessions and services
Aged care
Estate planning
Super death benefits
Advertisement
Compare super funds

Join SuperGuide Premium and give your retirement plans a boost.

Get access to independent expert commentary on the latest super, retirement and SMSF issues, including the top performing super and pension funds, how much super is enough, the latest super rates and thresholds and new super measures and strategies.

You’ll have access to more than 600 articles, how-to super guides, checklists, tips, calculators, reckoners and other tools, as well as a monthly newsletter.

Find out more

Footer

Important: Disclaimer

All information on SuperGuide is general in nature only and does not take into account your personal objectives, financial situation or needs.

You should consider whether any information on SuperGuide is appropriate to you before acting on it.

If SuperGuide refers to a financial product you should obtain the relevant product disclosure statement (PDS) or seek personal financial advice before making any investment decisions.

Learn more

About SuperGuide

SuperGuide is Australia’s leading superannuation and retirement planning website. Learn more

Superguide Pty Ltd ATF Superguide Unit Trust as a Corporate Authorised Representative (CAR) is a Corporate Authorised Representative of Independent Financial Advisers Australia, AFSL 464629

  • Contact us
  • Advertise on SuperGuide
  • Careers

Before using this website

  • New to SuperGuide?
  • Terms and Conditions of Use
  • Financial Services Guide
  • Privacy Policy and Privacy Collection
  • Copyright Policy
  • Editorial Policy and Complaints
  • Disclaimer

  • SuperGuide Premium
  • Subscriber feedback
  • Sitemap