In-Depth Analysis of the Four Major US Stock Market Indices and Investment Selection Guide

In the global capital markets, the major US stock indices have always been the key focus for investors. As the Federal Reserve’s rate hike cycle gradually concludes, various assets are rediscovering value pockets, and understanding the trend of major US stock indices has become crucial for grasping the pulse of the global economy.

Why Focus on Major US Stock Indices?

Major stock indices essentially provide a comprehensive measure of the performance of all or some listed companies within a country. Unlike country-specific indices like the Nikkei or Hang Seng, which are relatively narrow, US stock market indices are formed from a large number of listed companies across diverse industries, resulting in multiple distinctive index systems. Among these, the four most representative and valuable for reference are: Dow Jones Industrial Average, S&P 500, Nasdaq Composite, and Philadelphia Semiconductor Index.

Overview Comparison of the Four Major Indices

Dow Jones Industrial Average: A Barometer of Traditional Markets

As the earliest established among the four, the Dow Jones Industrial Average (ticker US30 or DJI) was born during America’s industrial era. It initially tracked 12 representative industrial companies, later expanded to 30, covering manufacturing, consumer, financial, and other traditional sectors.

Using a price-weighted method, the Dow is more sensitive to high-priced stocks. This also means that when adding new constituents, considerations include not only the company’s representativeness but also whether its stock price is excessively high. For example, Apple had to split its stock when it was included in the Dow due to its high share price. Many investors believe that 30 companies are no longer sufficient to fully represent the modern US economy.

S&P 500: The Most Balanced Reflection of the US Economy

To address the limited representativeness of the Dow, Standard & Poor’s launched the S&P 500, tracking the 500 largest US companies by market value. This index uses a market cap-weighted approach, with a self-regulating mechanism that naturally eliminates underperforming companies and introduces high-performing new ones, embodying a “survival of the fittest” principle.

To prevent shell companies with high valuations but poor performance from entering, S&P has established a dedicated committee to review the actual profitability of constituents. This strict screening, combined with broader industry coverage and larger company sizes, makes the S&P 500 the most widely recognized indicator of US economic health among investors.

Nasdaq Index: A Barometer of Tech Innovation

Founded in 1971, Nasdaq emerged as a fully electronic exchange, breaking the limitations of traditional blackboard trading. This innovative platform attracted numerous tech companies to list, leading to the creation of the Nasdaq Composite. With the rapid development of the US tech industry, the Nasdaq has evolved into the most important reference for investing in the tech sector.

With over 3,000 listed companies, investors mainly focus on the Nasdaq 100, which comprises the 100 largest by market cap, including giants like Apple, Google, and Facebook. For investors interested in Taiwanese stocks, the Nasdaq index’s movements are highly correlated with the Taiwan stock market, making it an important reference indicator.

Philadelphia Semiconductor Index: Industry-Specific Index

Following the Plaza Accord, the semiconductor industry became a focal point of global competition. In 1993, the Philadelphia Stock Exchange selected 30 representative semiconductor companies to compile the Philadelphia Semiconductor Index. As 3C products permeate daily life, the strategic importance and market value of semiconductor firms continue to rise, making the Philly Semiconductor Index the fourth major index of the US stock market.

Since major Taiwanese tech companies like TSMC are also constituents of this index, it has a significant influence on the Taiwan stock market. Whether for professional semiconductor investors or ordinary Taiwan stock investors, the Philly Semiconductor Index is a crucial market signal to watch.

Comparing Three Investment Tools for US Stock Market Exposure

Unlike investing in individual stocks, which involves stock-picking risks, investing in major indices only requires ensuring the continuous growth of the national or regional economy; the index will rise along with it. Taking the S&P 500 as an example, this index has an automatic “survival of the fittest” mechanism, allowing investors to profit as long as the US economy continues to grow, which is a long-term investment strategy advocated by Warren Buffett.

ETF (Index Stock Fund)

ETFs are funds that fully replicate the constituent stocks and weights of an index. Compared to traditional actively managed funds, ETFs have lower management fees because fund managers only adjust holdings according to the index weights without active stock selection.

Main Features:

• Traded like regular stocks, with high liquidity
• Low management fees (typically between 0.09%-0.21%)
• No leverage, only long positions
• Suitable for long-term periodic investment

Investors can purchase US stock ETFs through omnibus accounts or overseas brokers.

Futures

Futures are a long-established derivative instrument with time sensitivity and leverage effects. US stock market futures are typically settled every three months, with near-month and far-month contracts. Investors only need to pay margin to engage in long or short trading.

Core Characteristics:

• Leverage multiples usually between 15-35 times
• Support both long and short positions
• US stock futures have no daily price limits
• Not recommended to trade only with minimum margin to avoid large losses

Due to leverage and high market volatility, futures trading requires strong risk awareness and capital management skills.

CFDs (Contracts for Difference)

CFDs are derivative instruments similar to futures but offer more flexible trading conditions. The counterparty is the broker, not the market, so maximum loss is limited to the initial capital invested, with no risk of additional losses.

Advantages of CFDs:

• Higher leverage, up to 1-200 times
• Set stop-loss and take-profit points for precise risk management
• Low minimum deposit, around $100 to start trading
• Can be closed instantly, suitable for intraday trading
• No expiration date

Costs of CFDs:

• Overnight positions incur interest payments
• Choice of broker directly affects trading experience and fund security

Recommendations for Investment Strategies

Long-term investors should consider regular, periodic purchases of broad market ETFs. As long as investments are sustained, they can share in the growth of the US economy.

For short-term trading, futures and CFDs are viable tools. CFDs offer higher leverage and more flexible closing options but involve overnight fees; futures have a clear structure with no overnight costs but larger minimum trading units.

Summary

Major US stock indices serve as a barometer of global economic health. The four main indices each have their characteristics—Dow Jones represents traditional blue chips, S&P 500 reflects mainstream US economy, Nasdaq indicates tech innovation, and Philly Semiconductor focuses on industry specialization. Choosing appropriate investment tools and strategies, tailored to one’s risk tolerance and investment horizon, is key to achieving steady returns in the US stock market.