indexing

noun in·dex·ing \ ˈin-ˌdek-siŋ \

|Updated on: 14 Jul 2018

Definition of indexing

: indexation

Recent Examples of indexing from the Web

This rather misses the logic of indexing as a passive strategy.

— The Economist, "The growth of index investing has not made markets less efficient," 5 July 2018
Business leaders in 2014 fell short in their attempt to defeat the repeal of gas tax indexing, but in the process, showed they’re not always antitax or antifee.

— shirley leung, BostonGlobe.com, "With millionaires tax off the ballot, how else do we pay for transportation and education?," 19 June 2018
The rise of indexing during the last decade is a tacit acknowledgment that on average, cost matters more than stock-picking prowess.

— barry ritholtz, latimes.com, "Ranking the factors that help or hurt your investment returns," 14 June 2018
More: Low-cost indexing, penchant for stocks among Buffett's latest tips More: Warren Buffett made a 10-year bet on his market strategy.

— russ wiles, USA TODAY, "New requirement in corporate disclosures: Comparing CEO pay to average employees," 29 Mar. 2018
That process, known as indexing, was in place for 20 years until Democratic Gov. Jim Doyle and lawmakers from both parties ended the practice in 2005.

— patrick marley, Milwaukee Journal Sentinel, "Gas tax: Gov. Scott Walker opposes increasing it, Democratic candidates would hike it to avoid construction delays," 4 May 2018
Reinstating indexing would raise the gas tax by about 0.8 cents per gallon, according to the Legislature's budget office.

— patrick marley, Milwaukee Journal Sentinel, "Gas tax: Gov. Scott Walker opposes increasing it, Democratic candidates would hike it to avoid construction delays," 4 May 2018
Doubling of the gift and estate tax exemptions, to $10 million (expected to be $11.2 million for 2018 with inflation indexing).

— erin arvedlund, Philly.com, "Taxes in Philly? La Colombe's Todd Carmichael wants to pay more," 23 Apr. 2018
Also on the over-indexing list for Republicans: American Pickers, Pawn Stars, and This Old House.

— NBC News, ""Roseanne" TV reboot reveals latest divides in Red/Blue America," 8 Apr. 2018

These example sentences are selected automatically from various online news sources to reflect current usage of the word 'indexing.' Views expressed in the examples do not represent the opinion of Merriam-Webster or its editors. Send us feedback.

First Known Use of indexing

1974

in the meaning defined above

See Words from the same year

NEW! Time Traveler

Financial Definition of INDEXING

indexing

noun

What It Is

Indexing is a passive investment strategy that seeks to mimic or exceed the returns of a designated market index or other proxy.

How It Works

The strategy requires an investor to first choose an index to mimic. The index could be a well-known market index or it could be an index created especially for the investor. There are literally hundreds of established indexes investors can replicate.

Some indexes are exceptionally broad, such as the Nasdaq Composite Index or the Wilshire 5000 Index, which is considered the "total market index" because it contains several thousand stocks. Some indexes are very narrow, such as the American Stock Exchange Biotech Index (BTK), which measures the performance of 17 companies chosen to represent the biotech sector. There are also many international indexes designed to measure the performance of foreign markets. One of the most common is the Financial Times 100 Index, or FTSE, which measures the performance of equities traded on the London Stock Exchange.

The Dow Jones Industrial Average is probably the best-known and most widely followed financial index in the world. It consists of 30 of the largest publicly traded firms in the United States. The S&P 500 Index is also very common, comprising more than 70% of the total market cap of all stocks traded in the United States. The Nasdaq Composite is a broad market index that encompasses about 4,000 issues traded on the Nasdaq National Market -- virtually every firm that trades on the exchange.

For practical reasons, investors usually don't purchase all of the securities in an index. Doing so would be very expensive and time-consuming. Thus, investors usually have three choices when using an index strategy. They can choose a very narrow index that represents only a small portion of the market (such as the American Stock Exchange Biotech Index). Investors also can purchase a random sample of securities in an index (this is called a sampling approach) or they can purchase a set number of securities in each segment of an index (this is called a stratified approach). Some research suggests that investors can nearly replicate an index's performance by purchasing as few as 40 of the index's underlying securities.

Why It Matters

Indexing is one of four general types of investing strategies (the other three are the buy-and-hold, structured portfolio and active strategies). The strategy is primarily for long-term investors who want their returns to follow the market (i.e., they want to take on some market risk). The strategy limits this market risk and therefore limits returns.

Whether to use indexing is fundamentally a matter of the investor's opinion of whether securities prices always reflect all available information (i.e., the investor believes in the efficient markets theory). If the investor espouses this theory, then there is no such thing as an undervalued or overvalued security to that investor, and an active income investing strategy will not consistently produce returns that exceed the index after accounting for the added risks and transaction costs involved in the associated frequent buying and selling.

However, the fact that the investor must first select an appropriate index to pursue and then decide which underlying securities to purchase is why indexing is not a totally passive strategy. It usually involves more transaction costs than the buy-and-hold strategy and it also involves more active reinvestment of the proceeds and even rebalancing if the index changes. These factors also mean the investor's returns will be somewhat different than the index's returns. This is why the easiest way to implement indexing is to simply purchase shares of an index fund or ETF that tracks a particular index and let the fund manager handle many of these duties (for a fee, of course).

Source: Investing Answers