Security Market Indicator Series (SMIS)

What Is a 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.

Understanding a Security Market Indicator Series (SMIS)

A security market indicator series is 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: professional investors who charge fees to develop and execute investment strategies on behalf of their clients. To ensure that the fees are well earned, clients can compare a manager’s investment performance to a comparable SMIS.

This is especially important during bull markets when markets are generally rising. In these circumstances, even a mediocre money manager may deliver a decent return for investors. Using a carefully selected SMIS can help determine whether the manager is really adding value relative to the performance of the market as a whole.

Security Market Indicator Series (SMIS) and Index Funds

In addition to evaluating investment manager performance, an SMIS is also relevant in relation to index funds. An index fund is a type of passively managed investment vehicle that tracks the performance of an SMIS. Index funds have exploded in popularity in recent years because of their ease of use and low fees.

Some index funds are designed to hold all of the securities contained within a particular SMIS, while others hold a representative sample of those securities. Although both approaches tend to mirror the SMIS quite accurately, neither is perfect. The degree to which an index fund succeeds in accurately tracking its SMIS is captured by the fund’s tracking error.

Because index funds are managed by predetermined rules designed to mirror the market rather than outperform it, they offer broad market exposure without requiring the investor to select individual securities. For this reason, they are particularly attractive to inexperienced investors.

Even seasoned investors have come to favor index funds. Their passive management enables reduced fees, and studies have shown that index funds regularly outperform actively managed funds after taking the cost of fees into account.

Investing in SMIS

The best way to invest in an SMIS is by investing in exchange-traded funds (ETFs). ETFs track an index and invest in the securities of that index with investments managed by weight. ETFs provide diversification, low costs, and ease of use as they can be bought and sold like a stock through a brokerage account.

For example, if an investor wanted to invest in the S&P 500, gaining exposure to the companies that make up that index, they could purchase SPDR S&P 500 (SPY), which is an ETF created by State Street that seeks to mimic the performance of the S&P 500. There are countless ETFs like this that track a variety of indexes.

Real-World Example

Examples of SMIS which are widely used by investors include the Dow Jones Industrial Average (DJIA), the S&P 500 Index, the Nasdaq Composite Index, and the Russell 2000 Index. Popular international SMIS include the Japanese Nikkei 225 Index, the British FTSE 100 Index, and the German DAX Index.

In addition to these major SMIS, there are thousands of other SMIS in the U.S. alone. These smaller SMIS will often deal with specific industry niches or company characteristics, such as the size of the company, its risk-return profile, and its dividend payments.