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Why the stock market index is important for you

An investor in Malaysia could use an index from the United States to make informed decisions. Globally, among the well-known indices are the US Dow Jones Industrial Average and Nasdaq Composite Index.

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

Stock-picking and risk evaluation can be even more daunting for newbie investors, especially for those who are new to gauging market sentiment and stock fundamentals.

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

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

It is also suitable for the creation of investment products such as exchange-traded funds (ETFs), derivatives, structured products and index tracking funds.

Globally, among the well-known indices are the US Dow Jones Industrial Average and Nasdaq Composite Index, the UK 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 FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI). This is a tradable index which comprises the 30 largest companies on the Malaysian stock exchange by market capitalisation.

The FBM KLCI is often used as the 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 spoilt for choice when it comes to choosing the right stock market index as per their preferred market segment.

The best part is, an investor in Malaysia could use an index from the United States to make informed decisions, or mutual funds could benchmark their financial instruments to an index from the country.

Take Nasdaq’s PHLX Semiconductor Sector Index (SOX) as an example. This is the one of the United States’ best-known and most widely-tracked subsector indexes. Amid the 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 technology stocks enthusiasts.

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

Among the constituent stocks of the index are Broadcom Inc, Intel Corp, Nvidia Corp, Qualcomm Inc and Micron Technology. A number of these companies have exposure to Malaysia’s electrical and electronic sector, either through physical presence or indirectly via the supply chain. With a weightage of not more than 8% for each of the five largest constituents, and not more than 4% for the rest 25 stocks, the index offers a diversified portfolio with no excessive risk exposure to any particular stock.

The SOX has delivered a return of 41.16% in 2021. This means an investor who has invested RM100,000 in American technology stocks solely by buying the 30 stocks under the SOX as per the same weightage would have made more than RM41,000 in profits in a single year!

Globally, investors are spoilt for choice when it comes to choosing the right stock market index as per their preferred market segment.

Fund managers can also leverage on the SOX by benchmarking their fund to the index or by creating ETFs linked to the SOX, 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 globally.

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

On GSOX, one can find semiconductor companies involved in fabrication, microprocessor, volatile memory semiconductors, photolithography equipment and other front-end processing equipment, among others.

The semiconductor sector’s outlook remains robust, with the Semiconductor Industry Association forecasting a global revenue growth of 8.8% in 2022, after hitting record-sales of US$555.9bil (about RM2.34tril) in 2021. The constituent stocks of GSOX would likely be key beneficiary of the huge market potential, considering their market share in global semiconductor supply chain. By benchmarking their investments on GSOX, investors get to ride on the uptrend expected for the semiconductor sector.

Index options Apart from the SOX and GSOX, Nasdaq also offers other indices for technology sector enthusiasts. Particularly in the area of cybersecurity, there are several indices to choose from such as Nasdaq CTA Cybersecurity Index (NQCYBR), the ISE Cyber Security UCITS Index (HUR) and the ISE Cyber Security Index (HXR).

The NQCYBR, for example, tracks the performance of 35 companies engaged in the cybersecurity segment of the technology and industrial sectors. Among the constituent stocks are Accenture PLC, Cisco Systems Inc, Cloudflare Inc and Fortinet Inc.

In 2021, the index’s annual return 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.

Nasdaq offers more indices for investors to choose from, according to their area of interest. These indices are free of charge and publicly available to investors across the world. Providers of financial instruments such as mutual funds and ETFs can leverage these indices to offer a diversified range of products to their clients.

In recent years, funds benchmarked against a particular index have been getting more popular as they have proven to deliver stellar returns despite being passively managed. Globally, more index funds – funds that track a particular index – are being offered on strong demand as these funds are typically low in cost and even outperform actively-managed funds over the long run.

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