US indices

Four cuts of one market 

The United States is the most heavily indexed equity market in the world, and the four contracts in general use are not four views of the same thing. They differ in how many companies they cover, in how those companies are selected, and above all in how influence is distributed among them. Reading them as interchangeable proxies for the American stock market is the most common error in the class, and the days on which they disagree are the days on which the difference between them is doing the most work.

US 500, the broad benchmark 

The US 500 contract references the standard large capitalisation benchmark of the United States: several hundred of the largest listed companies, selected by a committee against published eligibility criteria covering domicile, listing, liquidity and profitability, and weighted by free float adjusted market capitalisation. Because it spans every major sector and is weighted by size, it is the closest thing the market has to a single number for itself, and it is the reference that most institutional performance is measured against.

Its weighting rule is also its defining characteristic. Capitalisation weighting means the largest constituents dominate, and over the past decade the concentration of the American market at the top has grown considerably. A broad benchmark whose largest handful of members account for a large share of its weight is a broad benchmark in name and a concentrated one in behaviour, and the level itself does not disclose this.

Wall Street 30, the price weighted survivor 

The Wall Street 30 contract references the oldest continuously published equity benchmark in general use, a curated list of thirty large, established American companies chosen by committee to represent the economy rather than to cover it. It is weighted by share price alone. A constituent quoted at a high share price exerts more influence than one quoted at a low price, whatever the two companies are worth.

That rule produces two behaviours worth knowing. The contract is dominated by whichever of its members happen to carry the highest share prices, which is a list that has nothing to do with size and changes whenever a constituent splits its stock. And with only thirty members, a single company's earnings report can move the whole contract in a way that would be diluted almost to invisibility in a broader index. It is a narrow, idiosyncratic measure with an unmatched history, and it is usually the least representative of the four.

US Tech 100, the growth concentrate 

The US Tech 100 contract references the large capitalisation benchmark of a single American exchange, excluding financial companies. That exclusion, plus the listing preferences of the technology sector over several decades, is what makes it the growth index in practice: it is heavily weighted toward software, semiconductors, internet platforms and consumer technology, and it carries almost none of the banking and insurance weight that the broad benchmark holds.

The consequence is a distinct sensitivity to interest rates. Companies whose value rests largely on profits expected far in the future are more sensitive to the rate at which those profits are discounted than companies earning steadily today, so a shift in rate expectations reaches this contract harder than it reaches the broad benchmark. On days when the two move in opposite directions, a rate repricing is the usual explanation.

US Small Cap 2000, the domestic measure 

The US Small Cap 2000 contract references the standard small capitalisation benchmark, drawn mechanically by rank from a much wider universe rather than by committee selection. Its constituents are smaller, more numerous, more domestically oriented and more likely to carry floating rate debt than the members of the large capitalisation indices.

Those characteristics make it the closest of the four to a measure of the domestic American economy and of domestic credit conditions. It responds to regional banking stress, to changes in borrowing costs and to domestic activity data more than it responds to global demand, and it carries far less of the foreign revenue that the largest constituents of the broad benchmark earn. A persistent gap between this contract and the broad benchmark is one of the standard ways market breadth is read.

When the underlying market trades 

The American cash equity session runs from half past nine in the morning to four in the afternoon New York time, and the index level itself is only computed from live constituent prices during those hours. Around it sit a pre market and an after hours session in which individual shares trade thinly, which is where most corporate earnings are actually released.

Index CFDs are quoted for far longer than the cash session, typically around the clock on weekdays with a short daily break. Outside cash hours the quote is derived from the related futures market rather than computed from constituent prices, and it continues to respond to news, to other markets and to overnight flows. This is why an American index contract can travel a considerable distance between one cash close and the next cash open with no share having traded on the exchange in between.

For a reader in the Gulf, the practical shape of the day is that the American cash session opens in the evening local time and closes after midnight, while the derived overnight quote covers the local working day. Scheduled American data and central bank decisions therefore land in the Gulf evening, and the contract is open when they do.

How the four disagree 

Because the four indices weight the same market differently, the same event reaches each of them with a different force. The pattern below is a description of the mechanism, not a prediction of any particular day.

• A large technology company reports. The effect is largest on the technology heavy contract, meaningful on the broad benchmark through the same constituent's weight, and close to absent on the small capitalisation measure.
• Rate expectations shift. The longer duration profile of the growth concentrate makes it the most sensitive; the small capitalisation measure responds through borrowing costs instead, which is a different channel with a different timing.
• A high priced constituent of the thirty member list moves. The price weighted contract records it disproportionately, and the capitalisation weighted indices barely notice unless the company is also very large.
• The dollar moves sharply. The large capitalisation indices carry substantial foreign revenue and respond; the domestically oriented small capitalisation measure carries far less and responds less.