If you’ve ever heard of the S&P 500 , Dow Jones, or ASX 200, you’re already familiar with some of the most well-known indexes in the world. But what exactly is an index? What does it measure? And can you invest in one?

An index is one of the most useful tools in the investing world. At Pearler, we’re fans of keeping investing simple, rewarding and consistent for the long haul. And learning how indexes work can be a great first step in building a calm, confident investment strategy.

In this guide, we’ll walk through what a stock market index is, how you can invest in one, and why it might be worth a spot in your long-term portfolio. Let’s take the complexity out of the search for long-term investing.

Definition: what is an index?

An index is a way to measure the performance of a group of investments. Most often, it tracks a group of shares .

Each index follows a set of rules. These rules decide which investments are included and how they’re weighted. Some indexes track large companies in a single country. Others focus on specific industries or global markets.

The investments within an index are called index components. They usually share something in common – like region, size, or sector. Indexes don’t all treat their components the same way. That’s where weighting comes in.

Some use market capitalisation , meaning bigger companies have a bigger impact on the index. Others use an equal weight approach, where every company counts the same, no matter its size. Then there are price-weighted indexes, like the Dow Jones Industrial Average , where companies with higher share prices have more influence on the index’s value.

Another thing to look out for is how an index handles dividends . Some indexes track only share prices . Others, called total return indexes, include dividend reinvestment to reflect overall growth.

Different methods can lead to different results. That’s why it's useful to understand how each index is built and maintained.

What role do indexes play in the world of investing?

Indexes are often used as benchmarks. Investors use them to measure how their own investments are performing. They help answer questions like “How is my fund going compared to the broader market?”

But indexes aren’t something you buy. As we’ve said, they’re tools – designed to track, not trade.

Fund managers, ETFs and other investment products often follow an index. This helps them match the market instead of trying to beat it. It’s a common strategy for those who want broad exposure with fewer decisions along the way.

Some investors also use indexes to guide specific strategies. For example, an ESG Leaders index focuses on companies with stronger environmental, social and governance practices. Other indexes filter by country, sector, size, or company type.

Whether you’re investing directly or through a fund, indexes can help you see how things are tracking – without needing to follow every single share.

What are the biggest indexes in the world?

There are hundreds of indexes around the world, but a few stand out for their size, reach, and recognition. Here are some of the most widely followed:

S&P 500

The S&P 500 is one of the most well-known stock market indexes.

It tracks 500 large US companies across different industries. It’s market-cap weighted, meaning bigger companies have a larger impact on performance. Many investors use it as a common benchmark for the US share market .

NASDAQ Composite

The NASDAQ includes over 3,000 companies listed on the Nasdaq exchange, with a strong focus on tech and growth stocks. It covers companies like Apple, Amazon and Tesla.

Like the S&P 500, the index is also market-cap weighted. And it’s often seen as a way to track the performance of the tech sector.

Dow Jones Industrial Average

The Dow Jones is one of the oldest indexes in the world.

It tracks 30 large US companies and uses a price-weighted index method, where higher share prices carry more weight. This means a company’s share price, not its size, affects how much it moves the index.

ASX 200

The ASX 200 follows the 200 largest companies on the Australian Securities Exchange (ASX) . It’s also market-cap weighted, giving more influence to companies like BHP, the big banks, and biotech company CSL.

Many Australian investors track the ASX 200 to understand how local shares are performing.

Each index includes different underlying stocks based on its focus. So while all indexes measure markets, they don’t all measure the same thing. Knowing their differences can help you put them in context.

Can I invest in indexes, and how?

You can’t invest directly in an index – it’s just a measure. But you can invest in a fund that follows one.

That’s where index funds come in. These funds are built to mirror the performance of a specific index, like the S&P 500 or ASX 200 .

There are two main types of index funds: index exchange-traded funds (ETFs) and index mutual funds.

• An index ETF trades on the share market, just like individual shares. You can buy and sell it during market hours. For example, the Vanguard Australian Shares Index ETF (VAS) tracks the ASX 300 , offering exposure to a wide slice of the Australian share market.
• An index mutual fund doesn’t trade on the exchange. Instead, you invest through the fund provider, and pricing happens once per day. An example is the First Trust NASDAQ-100 Tech Sector Index Fund (QTEC) , which invests in technology-related companies found in the NASDAQ-100 Index .

Both types aim to match (not beat) their chosen index. This approach is often called passive investing . Some investors use index funds to automate their investing and reduce decision fatigue. It's one way to build long-term exposure with less effort.

Index funds also tend to have lower fees compared to actively managed funds. And fewer trades can mean lower costs.

Of course, every fund has its own features, so it’s worth reading the fine print before investing.

How do index funds compare to other investments?

Index funds are just one way to invest – and they’re often compared to property. But they also differ from other options like individual shares , managed funds , and term deposits .

Each investment type comes with its own potential benefits and trade-offs. Here's a closer look:

Liquidity

• Index funds, especially ETFs, are generally easy to buy and sell. They trade on the share market during business hours, giving you flexibility if your situation changes.
• Property is less flexible. It can take weeks or months to sell and comes with legal and agent fees.
• Term deposits are low-risk and straightforward, but your money is locked away for a set time unless you pay a break fee.
• Managed funds may offer daily withdrawal options, but they don't provide the same instant access as ETFs.
• Individual shares are also liquid, but come with the challenge of researching and choosing each company yourself.

Diversification

• I ndex funds offer exposure to a wide range of index components – often hundreds of companies across different industries and countries.
• Property typically gives exposure to one asset in one location. That means less diversification unless you own multiple properties.
• Managed funds may offer diversification too, depending on how they're structured. Actively managed funds might also shift their holdings more frequently.
• Term deposits and individual shares don’t offer much diversification unless used as part of a broader portfolio.

Cost

• Index funds tend to have lower ongoing fees and don’t require a large amount of capital to get started.
• Property has higher upfront costs – think deposits, stamp duty, inspections, and legal fees – not to mention ongoing expenses like maintenance, rates, and insurance.
• Term deposits usually don’t have fees, but can offer lower returns. ETFs and managed funds may come with higher fees, especially if they’re actively managed.
• Buying individual shares might seem cheap upfront, but brokerage fees can add up if you're buying and selling regularly.

Volatility

• Index funds reflect market movement, which means they can rise and fall in value. They’re built to match the performance of a stock market index, so swings are expected.
• Property may seem more stable, but prices can shift based on interest rates, local demand, or broader economic conditions.
• Term deposits are typically low volatility, but they don’t grow much beyond the fixed interest rate.
• Managed funds and individual shares can both be volatile, depending on the strategy and stock selection.

Here’s a summary table to help you digest the differences between the investment types:

Investment type	Liquidity	Diversification	Cost	Volatility
Index funds	High (ETFs trade daily)	Broad (hundreds of shares)	Low fees, low entry cost	High – Dependent on the market it tracks
Property	Low	Low (one location)	High upfront and ongoing	Medium – Can rise or fall in cycles
Term deposits	Low to medium	None	No fees, fixed return	Low – stable but limited growth
Managed funds	Medium	Varies (depends on fund)	Can be higher (active fees)	High – depends on strategy
Individual shares	High	Low (unless owning many)	Low to moderate (plus brokerage)	Very high – depends on company

No single investment type ticks every box. What works for you might not work for another investor.

As mentioned, when considering what to invest in, think about your goals, risk comfort, and how hands-on you want to be.

Keep it boring, keep it working

Indexes might seem like a technical detail, but they’ve become a key part of how many people approach investing today.

They’re not products or strategies on their own but are simply a way to measure how a group of investments is performing. That’s it.

Whether you’re investing through an ETF, a mutual fund, or building your own portfolio, indexes can help bring structure and clarity to your approach. They take some of the guesswork out. And for long-term investors, that may be a good thing.

So if you’re figuring out what fits your goals, you might want to consider the role of indexes. They're steady, straightforward – and, yes, a little boring.

Sometimes, that’s what works.