Why the stock index is important to you

WITH thousands of stocks listed on a market, it can be cumbersome and time consuming for an investor to decide on the best accountants to invest in.

Stock selection and risk assessment can be even more daunting for novice investors, especially those new to gauging market sentiment and stock fundamentals.

This is where stock indices come in handy as they benefit all types of investors, including fund managers and experienced retail investors.

What is a stock index?

An index serves as an indicator for a particular stock market or group of stocks, even as a broad benchmark for various sectors.

It is also suitable for building investment products such as Exchange Traded Funds (ETFs), derivatives, structured products, and index tracker funds.

Globally, well-known indices include the US Dow Jones Industrial Average and Nasdaq Composite Index, the UK’s FTSE 100, China’s Shanghai Composite Index, and Japan’s Nikkei 225.

In the case of the Malaysian stock market, there are a number of indices that provide investors with comprehensive data.

The main index for Bursa Malaysia is the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI). This is a tradable index comprising the 30 largest companies on the Malaysian stock exchange by market capitalization.

The FBM KLCI is often used as an indicator of domestic market sentiment. An increase in FBM KLCI is seen as positive investor sentiment in the Malaysian stock market and vice versa.

Globally, investors are spoiled for choice when it comes to choosing the right stock index based on their preferred market segment.

The best part is that an investor in Malaysia could use a US index to make informed decisions, or mutual funds could compare their financial instruments to a country index.

Take Nasdaq’s PHLX (SOX) Semiconductor Sector Index as an example. This is one of the best known and most followed subsector indices in the United States.

Amid strong demand for semiconductor products globally, especially with the rise of artificial intelligence, cloud computing and the Internet of Things, the SOX is the right index for tech stock enthusiasts.

It is a capitalization-weighted index composed of the 30 largest semiconductor companies listed in the US. The constituent stocks are primarily engaged in the design, distribution, manufacture, and sale of semiconductors.

Constituent stocks in the index include Broadcom Inc, Intel Corp, Nvidia Corp, Qualcomm Inc and Micron Technology. Several of these companies have exposure to the Malaysian electrical and electronics sector, either through physical presence or indirectly through the supply chain.

With a weighting of no more than 8% for each of the top five constituents and no more than 4% for the remaining 25 stocks, the index offers a diversified portfolio without excessive exposure to the risk of any one stock.

SOX has generated a return of 41.16% in 2021. This means that an investor who invested RM100,000 in US tech stocks by just buying the 30 SOX stocks with the same weighting would have made over RM41,000 in profit. . in a single year!

Globally, investors are spoiled for choice when it comes to choosing the right stock index based on their preferred market segment.Globally, investors are spoiled for choice when it comes to choosing the right stock index based on their preferred market segment.

Fund managers can also take advantage of SOX by benchmarking their fund against the index or creating SOX-linked ETFs, among other ways.

There is also the Nasdaq Global Semiconductor Index (GSOX), which is designed to measure the performance of the 80 largest semiconductor companies in the world.

While 59% of the constituent stocks are concentrated in the US, GSOX is better diversified than other US-only semiconductor indices. Around 13.7% of the index weight is contributed by companies from Taiwan, followed by the Netherlands (10.8%) and Japan (6.2%). Inari Amertron Bhd, listed in Malaysia it is also part of GSOX.

At GSOX, you can find semiconductor companies involved in manufacturing, microprocessors, volatile memory semiconductors, photolithography equipment, and other front-end processing equipment, among others.

The outlook for the semiconductor sector remains strong, with the Semiconductor Industry Association forecasting global revenue growth of 8.8% in 2022, after reaching record sales of US$555.9 billion (about RM 2.34 tril) in 2021. GSOX’s constituent shares would likely be a key beneficiary of the huge market potential, considering its market share in the global semiconductor supply chain.

By comparing their investments with GSOX, investors can take advantage of the expected uptrend for the semiconductor sector.

index options

In addition to SOX and GSOX, Nasdaq also offers other indices for tech enthusiasts.

Particularly in the area of ​​cybersecurity, there are several indices to choose from, such as the Nasdaq CTA Cybersecurity Index (NQCYBR), the ISE Cybersecurity UCITS Index (HUR), and the ISE Cybersecurity Index (HXR).

The NQCYBR, for example, tracks the performance of 35 companies involved in the cybersecurity segment of the technology and industrial sectors. Constituent shares include Accenture PLC, Cisco Systems Inc, Cloudflare Inc and Fortinet Inc.

In 2021, the annual return of the index was recorded at 20.4%.

The 56-stock HUR and the 63-stock HXR, on the other hand, posted annual returns of 8.67% and 5.19% respectively in the same year.

Nasdaq offers more indices for investors to choose from, depending on their area of ​​interest.

These indices are free and publicly available to investors around the world. Providers of financial instruments such as mutual funds and ETFs can take advantage of these indices to offer a diversified range of products to their clients.

In recent years, funds benchmarked against a particular index have become more popular as they have been shown to generate stellar returns despite being passively managed.

Globally, more index funds (funds that track a particular index) are being offered due to strong demand, as these funds are typically low cost and even outperform actively managed funds over the long term.

To understand more about the Nasdaq Global Index, go to www.nasdaq.com/global-indexes

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