WITH thousands of stocks listed on a market, it can be cumbersome and tedious for an investor to decide which counters are best to invest in.
Stock picking and risk assessment can be even more daunting for newbie investors, especially those unfamiliar with assessing market sentiment and stock fundamentals.
This is where stock indices come in, benefiting 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 exchange or group of stocks, including as a general benchmark for various sectors.
It is also suitable for creating investment products such as exchange-traded funds (ETFs), derivatives, structured products and index funds.
Globally, well-known indices include the 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.
Bursa Malaysia’s main index is the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI). It is a tradable index that includes the 30 largest companies in 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 benchmark their financial instruments against a country index.
Take the Nasdaq PHLX Semiconductor Sector Index (SOX) as an example. It is one of the best-known and most followed sub-sector indices in the United States.
Amid strong global demand for semiconductor products, especially with the rise of artificial intelligence, cloud computing and the Internet of Things, SOX is the right index for tech stock enthusiasts.
It is a capitalization-weighted index comprised of the 30 largest listed semiconductor companies in the United States. Constituent stocks are primarily involved in the design, distribution, manufacture and sale of semiconductors.
Among the index’s constituent stocks are Broadcom Inc, Intel Corp, Nvidia Corp, Qualcomm Inc and Micron Technology. A number of these companies have exposure to the Malaysian electrical and electronics sector, either through their physical presence or indirectly through the supply chain.
With a weighting of no more than 8% for each of the five main 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.
The SOX generated a return of 41.16% in 2021. This means that an investor who invested RM100,000 in US tech stocks just by buying the 30 stocks below the SOX at the same weighting would have made over 41,000 Profit RM. in just one year!
Fund managers can also take advantage of SOX by benchmarking their fund against the index or creating SOX-linked ETFs, among other things.
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 constituent stocks are concentrated in the US, GSOX is better diversified than other US-only semiconductor indices. About 13.7% of the index weighting is contributed by Taiwanese companies, followed by the Netherlands (10.8%) and Japan (6.2%). Inari Amertron Bhd, listed company in Malaysia is also part of GSOX.
On GSOX, one 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 industry remains strong, with the Semiconductor Industry Association predicting global revenue growth of 8.8% in 2022, after hitting record sales of US$555.9 billion (about RM2.34 trillion). ) in 2021. Constituent stocks of GSOX would likely be key. beneficiary of the huge market potential, given their market share in the global semiconductor supply chain.
By comparing their investments on GSOX, investors are taking advantage of the expected uptrend for the semiconductor sector.
Along with the SOX and GSOX, the Nasdaq also offers other indexes for tech enthusiasts.
Particularly in the area of cybersecurity, there are several indexes to choose from, such as the Nasdaq CTA Cybersecurity Index (NQCYBR), ISE Cyber Security UCITS Index (HUR), and ISE Cyber Security Index ( HXR).
The NQCYBR, for example, tracks the performance of 35 companies engaged in the cybersecurity segment of the technology and industry 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 63-stock HXR, on the other hand, posted annual returns of 8.67% and 5.19% respectively in the same year.
The Nasdaq offers more indices for investors to choose from, depending on their area of interest.
These indices are free and publicly available to investors worldwide. Providers of financial instruments such as mutual funds and ETFs can leverage these indices to offer a diverse range of products to their clients.
In recent years, funds benchmarked against a particular index have become more popular as they have proven to deliver exceptional returns despite being passively managed.
Globally, more index funds – funds that track a particular index – are being offered due to high demand, as these funds are generally inexpensive and outperform even actively managed funds over the long term.
To learn more about the Nasdaq Global Index, visit www.nasdaq.com/global-indexes