Investing term

What is Benchmark?

The reference index a fund compares itself to — e.g. the S&P 500, MSCI World, or Bloomberg Aggregate.

A benchmark is the reference index a fund or portfolio measures itself against — the S&P 500 for US large companies, MSCI World for global stocks, the Bloomberg Aggregate for US bonds. It answers the only fair question about active management: did this fund beat the cheap, do-nothing alternative of just owning the index?

For example

A US stock fund that returns 9% in a year its benchmark returned 11% actually underperformed — the benchmark is what turns a "good" number into an honest one.

Benchmark is taught hands-on in Stage 6 — Index Funds, ETFs & Mutual Funds.

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Related terms

Active fundA fund whose manager picks stocks in the hope of beating a benchmark.Creation/redemptionThe mechanism that keeps ETF prices close to NAV. Authorized participants swap baskets of underlying stocks for ETF shares (or vice versa).DistributionThe income a fund pays out to its shareholders — dividends from stocks held, plus realized capital gains.ETFExchange-Traded Fund — a basket of many stocks (or bonds) bundled into a single share that trades on an exchange like a regular stock.
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