“Index Providers Are Massively Dull—and Massively Profitable” was a Financial Times Alphaville headline that caught my eye in 2024. I consider the author Robin Wigglesworth to be a must-read. I loved his book Trillions about the Birth of passive investing, and he once made me laugh by describing his name as “Harry Potter-esque.”
Wigglesworth is certainly right about the index industry’s profitability, and my wife would agree with the “dull” part. Her eyes glaze over at the very mention of “beta,” while my attempts to explain the difference between “rebalancing” and “reconstitution” have killed more than one date night.
Still, as a 10-year veteran of Morningstar Indexes, I take the insinuation that indexing is boring as a challenge. Remove your wand, Mr. Wigglesworth. (That’s a Harry Potter dueling reference for the uninitiated.) Here, I will argue that analyzing indexes can yield meaningful insights for investors. Not dull at all.
Wait, You Do What?
When I moved from Morningstar’s Manager Research team to the indexes group in 2015, I got a lot of furrowed eyebrows.
“So, you’re going to analyze benchmarks?”
Sort of. Morningstar has a passive strategies research team that parses the index methodologies underpinning exchange-traded funds and other investments. As a strategist with Morningstar Indexes, my role is to write and talk about investing through the lens of our proprietary benchmark range.
“Lens” is a metaphor I borrowed from Morningstar Managing Director Don Phillips. He’s a professional hero—the kind of guy who quotes Blaise Pascal and also road trips to Traverse City Pit Spitters minor league baseball games—when he’s not inventing the Morningstar Style Box. He sees indexes as tools that serve investors.
“With the recent mania to create investable indexes for ETFs, it’s easy to lose sight of the utility of indexes as analytical tools,” Phillips wrote in a 2009 article called “A Multiple-Lens Approach to Analysis.” “When properly constructed, an index can facilitate a better understanding of investment activities. It can be a lens that brings investment issues into focus, providing a framework that allows for better analysis. While no one lens will explain all markets, a series of lenses can forge a valuable toolkit for investment analysis.”
Consider indexing’s origins. When Messrs. Dow and Jones created the first market index, it wasn’t for benchmarking purposes, and they certainly didn’t envision passive, index-tracking investment strategies. It was simply a measure that told newspaper readers if the market was up or down. When stock exchanges got into indexing it was to showcase their listed companies, while bond indexes began as a means of displaying inventory.
Defining “the market” remains the index’s essential function. As baskets of securities meant to represent the opportunity set for investors, they delineate asset classes and investment segments. Indexes measure risk and return, reflect market composition, and power portfolio-building models.
Indexes Bring Investment Issues Into Focus
Wigglesworth is right that the day-to-day mechanics of indexing involve drudgery. Hats off to my Morningstar Indexes teammates who do the “dull” but critical work of ensuring our benchmarks accurately represent ever-changing markets. Getting the data right is foundational. To build and maintain an index, you have to track not just securities’ price movements but also corporate actions like dividends, mergers and acquisitions, rights issues, and spinoffs. When Eli Lilly acquired Morphic, for example, or when Johnson & Johnson spun off its consumer health business, indexes had to be updated.
Meanwhile, fixed-income indexing requires staying on top of corporate issuance and asset-backed securities, as well as the debt of governments, local authorities, and agencies. A vast range of securitizations span different rates, maturities, and cash flow structures. Constructing the Morningstar LSTA US Leveraged Loan Index is a highly complex endeavor.
While my colleagues do the essential work, I have the fun job of using our indexes as lenses.
10 Not-So-Dull Market Insights From Morningstar’s Indexes
A “multiple-lens approach to analysis” can both explain historical market behavior and inform future portfolio positioning. Indexes can help highlight risks. They can also help uncover opportunities. Here are a few of the many market insights our indexes currently provide:
- US stocks, measured by the Morningstar US Market Index, gained 57% on a cumulative basis in 2023 and 2024—an incredible rebound from 2022’s 19% decline. The technology sector, led by artificial intelligence-boom beneficiary Nvidia NVDA, has accounted for more than half the gain.
- The US stock market has become less diversified by stock and sector. The top 10 companies now represent 31% of the Morningstar US Market Index’s value, up from less than 20% at the start of 2020. Tech stocks also made up roughly 20% of the US market five years ago and now exceed 32% of its value.
- Stocks outside of the US, represented by the Morningstar Global Markets ex-US Index, returned just 11% in US-dollar terms from 2023 through 2024. The technology sector represents less than 14% of developed- and emerging-markets equity value.
- Only a few countries’ equity markets outperformed the US over the past two years. The Morningstar Taiwan Index and Morningstar Greece Index stand out. Taiwan Semiconductor’s TSM AI-powered gains explain that country’s strength, while Greece’s turnaround from its years at the heart of the euro crisis has been impressive. On the negative side of the ledger, the Morningstar Mexico and Morningstar Brazil indexes both suffered losses of more than 25% in dollar terms in 2024. Election results were a big factor in Mexico, while fiscal challenges undermined investor confidence in Brazil.
- Small-cap stocks have badly underperformed in the US. In fact, the combined market capitalization of the two largest US companies, Apple AAPL and Nvidia, exceeds the entire $5 trillion value of the Morningstar US Small Cap Extended Index.
- Of the most commonly cited equity factors, or sources of return, only quality and momentum have beaten the market over the past 10 years. Morningstar factor indexes representing yield, low volatility, size, and value have all lagged the broad US market.
- Dividend-screened portfolios of various kinds have failed to keep up with the broad US stock market over the past 10 years, though companies growing their payouts, as represented by the Morningstar US Dividend Growth Index, have done better than high yielders.
- Investment-grade debt securities, as represented by the Morningstar US Core Bond Index, barely mustered a gain in 2024, despite three interest rate cuts in the US and central bank loosening around the world. Roughly 45% of the US investment-grade bond universe is composed of Treasuries, reflecting heavy government debt issuance.
- High-quality bonds notably rose in value during stock market selloffs in August and September 2024. That’s a contrast to 2022, when both stocks and bonds fell in tandem, but reminiscent of the diversification benefits fixed income offered during the equity bear markets in 2020, 2008, and 2000-02.
- At $1.4 trillion, the size of the US syndicated bank-loan market, as measured by the Morningstar LSTA US Leveraged Loan Index, has surpassed high-yield bonds in size.
A subset of Morningstar’s index range appears on Morningstar.com, and all our benchmarks and their explanatory materials are posted on the Morningstar Indexes website. For the visually oriented, barometers depicting the performance of US style and size segments as well as developed and emerging equity markets appear on Morningstar.com’s Markets page. Used together, these indexes “facilitate a better understanding of investment activities,” in Don Phillips’ words. As market lenses, they are not just fascinating, but also essential.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
