Energy Investing: Indexes - dummies

By Nick Hodge, Jeff Siegel, Christian DeHaemer, Keith Kohl

An index is a measure of change in the value of a securities market. In energy investing, think of it as an imaginary portfolio of securities representing a certain market or specific sector of the market.

You’re probably already familiar with some indexes, like the Dow Jones Industrial Average or the Standard & Poor’s 500 (S&P 500), which are often cited as the broadest measures of the stock market. This table shows the four most closely watched stock market indexes in the United States.

The Four Most-Watched U.S. Indexes
Index Description Owner
Dow Jones Industrial Average Tracks 30 large U.S.-based companies CME Group
Standard & Poor’s 500 Tracks 500 leading companies; best representation of overall
stock market performance
Nasdaq Composite Tracks more than 3,000 companies, some foreign, that trade on
the Nasdaq exchange
Russell 2000 Tracks 2,000 small-cap stocks Northwestern Mutual

The owners of these indexes offer many other indexes that track specific sectors of the market. There are retail indexes, transportation indexes, finance indexes, bond indexes, indexes for specific countries, and more. Of course, there are also energy-specific indexes. You can see the most common energy indexes, along with their annual returns since 2008, in this table.

Common Energy Indexes’ Annual Performance vs. Dow Jones
Index 2008 Return 2009 Return 2010 Return 2011 Return 2012 Return Average Return
Dow Jones Industrial Average –35% 20% –11% 6% 6% –2.8%
Dow Jones U.S. Select Oil Equipment & Services –62% 66% 29% 7% –2% 7.6%
Dow Jones U.S. Coal Index –64% 114% 34% –48% –36% 0.0%
Dow Jones Global Utilities Index –32% 6% –3% –8% 0% –7.4%
World Nuclear Association Nuclear Energy Index –49% 32% 15% –25% 1% –5.2%
Nasdaq Clean Edge Green Energy –60% 44% 3% –42% –5% –12%

The past few years have obviously been tumultuous for financial markets. As you can see in this table, oil and gas outperformed the broad market, while utilities, nuclear, and renewable energy underperformed.

Looking at the annual returns of indexes enables you to compare sectors to one another and to the broader market. Indexes are a useful tool to gauge how the market and specific sectors of it are trading. You can’t invest directly in indexes.

Instead, they form the basis for a variety of mutual funds and exchange-traded funds that track their performance, allowing you to invest in the overall performance of whatever the index is tracking without having to buy shares of every company.