Benchmarks are average or standard measurements of the performance of an investment market or asset class. They usually serve as a base for comparing the performance of an individual holding against the benchmark overall market performance.
Kinds of benchmarks
National stock-market indexes like America's Dow Jones Industrial Average, Japan's Nikkei 225 or Germany's DAX are the best known and most widely used benchmarks for equity investors. But sector-based indexes like the small-cap Russell 2000 Index and the NASDAQ Biotechnology Index are growing in popularity, while global-market investors prefer Morgan Stanley Capital International's three-continent EAFE Index.
Bond markets also employ different indexes as benchmarks for different markets and sectors. The widely-used Lehman Brothers Aggregate Bond Index, an accumulation of several bond market indexes, forms a traditional benchmark for bond funds. Yields on 10-year U.S. Treasury bonds are considered one of the strongest benchmarks for long-term bond performances.
Some investors look beyond the markets themselves to the broader national or international economic outlook for performance guages. Short-term interest rates are probably the most commonly-employed indicator benchmark but quarterly employment, productivity and GDP numbers are all valued by traders and investors as 'reality check' benchmarks.