Security Market Indicator Series (SMIS)

A security market indicator series (SMIS) is a market index or average that uses the performance of a sampling of securities to represent the performance of a market or market segment. Prominent SMIS in the United States include the Dow Jones Industrial Average (DJIA), the Nasdaq Composite Index, and the S&P 500 Index.

Security market indicator series are often used in benchmarking. For example, an analyst may compare a security that is broadly considered as high growth to a sampling of similarly labeled securities to see whether the security outperforms or underperforms its market segment

Similarly, investors can use SMIS to rate money managers. In an expanding market, even a mediocre money manager may deliver a decent return for investors. What’s important in rating a money manager is comparing his or her returns to the general performance of the market or relevant market segment. Money managers charge fees to develop and execute investment strategies for their clients. Those fees can only be justified by performance. Therefore, investors should make sure that their money managers outperform the market after taking into account fees.

An index fund, a kind of passively managed mutual fund, tracks the performance of an SMIS. Index funds have exploded in popularity in recent years. Because they are managed by predetermined rules designed to follow the market rather than outperform it, they are particularly attractive to inexperienced investors, as they offer broad market exposure without requiring expertise on the part of the investor. Even seasoned investors have come to favor them. Their passive management requires a smaller management team, which reduces fees. What's more, depending on what data you review, index funds regularly outperform actively managed mutual funds after taking into account fees.

Some index funds match to an SMIS by holding virtually all of the stocks and securities followed by the market index. Others hold a representative sample of securities. Note that neither approach produces perfectly matched returns. The margin by which an index fund outperforms or underperforms the SMIS it tracks is the fund’s tracking error.

When using SMIS to make investment decisions, movement can be more important than nominal value. For example, on October 2, 2008, the Nasdaq Composite closed at 1,976.72, trending downward. On May 25, 2009, the Nasdaq Composite closed at 1,528.95, trending upward. Because of the importance of security movement in generating a return on investment, the lower figure suggested a generally healthier environment for investing in tech stocks.