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Trading

Which U.S. Index Is Best For Me To Trade?

Katya Stead
Financial Writer
20 Jul 2023
Everyone knows the broad exposure and potential great returns (or losses) of index trading. But with so many different indices available to trade on, it can be difficult to decide which one is best suited for your needs.

Let's look at the most popular U.S. indices and discuss the types and cetegories of market indices, so that you can make an informed decision about which index is right for you. We'll also look at the pros and cons of each index, as well as how to trade on them.

Types of market indices

Global market indices: The broadest and most general index type, these represent the performance of a broad range of stocks, both domestic and international, across different sectors and regions. Many of them will focus on one national stock exchange. Some of the best-known global stock indices include the Dow Jones Industrial Average in the USA and the FTSE 100 in the UK.

Sector indices: Unlike a normal international exchange, these track the performance of a sector or industry within a specific country or region. These indices provide traders with broad exposure to that area of the stock market, such as energy, technology or healthcare. An example of this is the S&P 500 Energy Index in America.

Commodity indices: These measure the performance of a basket of commodities such as gold, oil and agricultural products, without you having to actually purchase and store the assets. Some of the most popular commodity indices include the Bloomberg Commodity Index, Dow Jones-UBS Commodity Index and S&P GSCI Index.

Country indices: These measure the performance of a basket of individual stocks within a particular country or region. Some of the most popular country indices include the MSCI World Index and MSCI Emerging Markets Index.

Popular U.S. stock market indices

These are some of the biggest, most traded and most popular indices in America:

  • The S&P 500 index (also called the US500)
  • The Dow Jones Industrial Average (also called the US30)
  • The Nasdaq 100 index (also called the NAS100)
  • The Russell 2000 (also called the US2000)
  • The Volatility Index (VIX)

The US500

The US500, also known as the S&P 500, is one of the broadest indexes on our list, boasting 500 of biggest public companies in the United States, by market capitalisation. With hundreds of the biggest individual stock names in its fold, the U.S. 500 often acts as a 'who's who' of U.S. companies across various sectors. As such, it isn't associated with a certain industry like some indices are. It's also liquid and easy to trade, often making it a popular choice for short-term traders.

Trading the US500 may be right for you if:

Trading the US500 may not be for you if

You're a scalper, or a trader looking for a market that's known for frequent fluctuations to trade on.

You are focused on trading a more specific sector or type of stock than the general broad exposure of the S&P 500.

You are looking for a broad exposure index to a lot of different companies at the same time.

You are focused on trading a more specific sector or type of stock than the general broad exposure of the US500.

You're a fundamental analysis enthusiast, and love the idea of index trading that requires lots of keeping up to date with the news and macroeconomic trends.

Your aim is a truly global 'diversified portfolio' of trades to manage your trading risk. The S&P is not as diverse as other global market indices, since it only includes the 500 largest companies traded in the U.S. (which makes it vulnerable to certain sector volatility).

The US30

The Dow Jones Industrial Average index is the most famous of the Wall Street indices. Contrary to the name, the Dow Jones doesn't focus on the industrial sector - although this was its speciality back when it was first established in the late 1800s. Instead, it tracks the performance of 30 large companies in the U.S. across various sectors. The Dow Jones is a price weighted index, meaning each stock’s significance in the index is derived by its price per share. These include some of the biggest blue-chip companies in America like Apple, Microsoft, JP Morgan and Disney.

Trading the US30 may be right for you if:

Trading the US30 may not be for you if:

Because of how well-known it is, the Dow is also one of the most liquid indices, making it another popular choice for short-term traders.

Diversification is important to you. The Dow only includes 30 stocks, all cut from the same Wall Street cloth, so it may not provide as much diversification as some other indices.

You want exposure to high-profile, established, respected companies, making it a great choice for long-term investors.

You want the trading opportunity of high volatility and frequent, extreme price swings.

Because it’s made up of such high-profile companies, many consider the US30 a good benchmark of the health of the U.S. economy. If you’re looking for indicators like this in your indices, the Dow could be for you.

Because of its large size and influence, the US30 can be vulnerable to market manipulation from institutional investors. If you're concerned about this, it's best to stay away.

It's more concentrated than the S&P 500, so can provide more targeted exposure while still offering similar stocks.

Even though the Dow isn't associated with one industry, its narrow focus means that it is more vulnerable to certain sector volatility, as there's only a few sectors it covers. This could hamper returns if one of those sectors were to face headwinds - for example banking or FAANG stocks.

You don't have a very high risk appetite, or you're not a very experienced trader yet. Since the index is made up of blue chip stocks, it tends to be less volatile than other indices. That being said, CFDs are complex products, so anyone trading in index CFDs should be somewhat comfortable with high risk.

The Nasdaq 100

The Nasdaq 100 is a tech-heavy index, which tracks the performance of the 100 largest companies (based on a modified market capitalisation weighted calculation) of the 3000-odd companies traded on the Nasdaq Stock Exchange. These are primarily technology stocks, but the NAS100 also includes biotech and pharmaceutical companies, as well as some retail and finance companies.

Trading the NAS100 may be right for you if:

Trading the NAS100 may not be for you if:

You're bullish on tech stock in particular, as the NAS100 provides broad exposure to a wide range of technology sector shares.

You're not so sure about the tech industry's prospects. As with any technology-focused index, its performance is often dependent on how well the tech sector is performing overall.

You want more exposure, in the tech or pharma sectors at least, to more growth stocks than indices like the Dow and the S&P 500 can give you.

This means that there can be significant volatility in returns over short periods of time, so if that makes you nervous, best to stay away.

You have a longer-term trading style. The NAS100 is frequently associated with big fluctuations in the short term - but also is known for frequently giving good returns in the long term.

The US2000

The Russell 2000 focuses on small-cap companies, with market capitalisations of between $2 billion and $10 billion. In other words, it offers exposure to smaller companies than the 'big leagues' stock on the Dow, S&P and Nasdaq. Because of this, it's one of the most widely used benchmarks for U.S. small-cap stocks, and tracks 2000 different stocks across a wide range of sectors and industries. It's also often seen as a more telling barometer of how U.S. businesses are doing than many other indices.

Trading the US2000 may be right for you if:

Trading the US2000 may not be for you if:

You're a growth stocks enthusiast. Because it consists of small-cap stock and penny stocks, the US2000 provides exposure to more dynamic and potentially higher-growth stocks, while still providing diversification.

You want to focus on large-cap, 'big name' stocks - that's better served by indices like the Dow or S&P 500.

You want a macroeconomic bellwether for the little guy. The Russell 2000 is seen by many traders and investors as a barometer for the U.S. economy, so keeping an eye on its performance can help you gain insight into economic fluctuations.

When macroeconomic crises come, they often affect smaller-cap companies more than larger ones, which are shielded somewhat by their wealth. For example, the banking crisis involving SVB hit the Russell 2000 harder than it did the S&P 500. If that makes you nervous, the US2000 may not be a fit for you.

You want to hedge other U.S. index trading positions. The US2000 has a low correlation with the other major indices, meaning it can act as a hedge against downturns in other markets.

Small-cap stocks can be more volatile, so if you're a frequent trader who prefers low risk, this might not be the right index for you.

The VIX

The Volatility Index (VIX) isn’t a stock market index per se - rather, it’s a measure of implied volatility. Still, if you're looking for index trading that can provide an adrenaline rush like no other, the VIX is one to watch. The VIX measures market volatility and risk sentiment on the S&P 500 index, which is used as a barometer for the market as a whole. It's calculated by taking the weighted average of the options trades on the S&P 500 index. Also known as 'the fear index', the VIX is seen as an indicator of market sentiment and risk appetite, plus how investors are reacting to geopolitical events and economic conditions.

Trading the VIX may be right for you if:

Trading the VIX may not be for you if:

You're an experienced trader looking for thrills, along with the chance of very high returns - but also very high potential losses.

You're a beginner trader who hasn't been doing this for very long. What rodeo is to horse riding, the VIX is to indices. It takes skill and a thorough knowledge of the financial markets to ride the unpredictability of the VIX.

The VIX is volatility incarnate and as such can move very fast, in very extreme ways. This may make it most suitable for a scalper or a day trader who really knows what they're doing.

You are a risk-averse trader uncomfortable with the idea of significant potential losses.

The VIX reacts to geopolitical events and macroeconomic headlines. If you're a professional trader who enjoys staying up-to-date with current events, the VIX could be perfect for you.

The VIX is often seen as a barometer of market sentiment and 'fear' itself, which means that it's almost constantly reacting to macro news around the world. If you are a more casual trader who wants to open and hold a position without checking the charts or your news feed frequently, the VIX is likely not for you.

You want a hedge against other U.S. indices. The VIX tends to move in opposite directions to the S&P 500 index, which makes it a great hedge against market downturns.

Likewise, if you’re a trader who doesn’t have a very good, proven strategy to keep their emotions in check, it may be best to give the VIX a miss until you do.

Which index is best for me to trade on? Factors to consider:

  • Your risk appetite - some indices have more daily fluctuations, and more volatility, than others
  • Your trading style - if you're a scalper, you may want to look at indices which are more liquid and have more movement or volatility, rather than more stable indices. If you have a longer-term trading style, the opposite may be true.
  • What type of stock you're interested in - some indices are associated with certain sectors. For example, the Nasdaq 100 is associated with tech companies.
  • Whether you prefer an index that’s weighted by market cap or by price. While the most expensive shares will affect a price-weighted index the most, market cap weighted ones will instead be affected by stocks’ performance.
  • How much time you want to spend on trade - generally speaking, more volatile indices require more attention. You'll need to watch positions a lot until they're safely closed to limit your chances of significant losses. Traders of less volatile indices can get away with less monitoring of the financial markets, charts and headlines.
  • Whether you prefer technical analysis or fundamental analysis - indices that react to geopolitical events require more fundamental analysis. An index that doesn't may benefit more from technical analysis.

How to trade on U.S. indexes

With us, you’ll use trade on indices using Index CFDs. Index CFDs are a type of Contracts for Difference (CFDs) that allow you to speculate on the price movements of your chosen index as the underlying asset class you’ll be trading. This is significantly different to investing, in which you’d have to purchase Exchange Traded Funds (ETFs) to gain exposure to indices (see more about this in our FAQs below).

Instead of paying 100% of the cost of your ETF as you would when investing, CFDs are leveraged. That means traders are only required to put up a small percentage of the full value of the underlying asset, known as margin (a type of minimum deposit), which allows them to gain exposure to a larger position than they could with traditional trading methods.

Find out more about trading on leverage

Here how you'd trade on indices using index CFDs:

  1. Choose a reputable online broker like Pepperstone that offers both indices and trading instruments like ETF CFDs
  2. Create an account and fund it to get started
  3. Open your first live index trade on the platform
  4. CFDs are complex instruments, so consider setting up stop loss and take profit orders to maximise your risk management
  5. Monitor the markets and close your trade when ready

So, what U.S. index is right for you? The TL;DR Summary:

  • Indices are financial instruments that give you broad exposure to a wide selection of stock, all grouped together into one position, rather than you trading on individual stocks... and some of the most famous and most popular ones in the world are U.S. indices.
  • The US30 (also known as the Dow Jones Industrial Average) may be right for you if you want a less volatile, but also less diversified, index housing some of the biggest U.S. corporations.
  • The US500 (also known as the S&P 500) may be right for you if you want broader exposure to blue chip U.S. companies that are more liquid and more volatile than the Dow.
  • The NAS100 (also known as the Nasdaq 100 index) may be right for you if you specifically want to focus on U.S. companies in the technology, pharmaceutical and biotech spaces.
  • The US2000 (also known as the Russell 2000) may be right for you if you'd rather focus on small-cap stocks from a variety of sectors.
  • The VIX may be right for you if you're a professional trader, or at least a very experienced trader, who wants the thrill of a fast-moving, very volatile financial market responsive to news.

Frequently Asked Questions

Q: What is an index?

A: An index is a type of asset which is a collection of stocks with something in common (for example, high market cap U.S. stocks or the biggest stocks in Japan by price weight). With an index, you can trade on multiple different companies with a single position. They’ll also provide broader exposure to macro moves in the market than a single stock would.

Q: What are indices?

A: While indexes is the plural of an index, indices means something a little different. Indices is the mathematical terminology for what an index does - namely a group or list of different figures. In the case of the markets, that list or group would be stocks’ share prices.

Q: What is an ETF? What’s the difference between that and an index?

A: An index is an asset class to trade on, while exchange-traded funds (ETFs), a type of investment vehicle that tracks the performance of a specific index or a basket of assets. Exposure to indices mostly happens using ETFs, which are designed to provide investors with exposure to a diversified portfolio of assets.

Q: How do I trade on indices?

A: You can trade on indices using Index CFDs. Simply create a live account with Pepperstone, learn more about indexes and trading on leverage, and open your first position. 

*Please note that the stocks contained within an index are subject to change, based on that specific index’s rules and weighting. As such, it’s imperative to do your own research when trading indices. While every effort has been made to ensure the accuracy of our content at the time of writing, things change - in life and in markets.

The material provided here has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Whilst it is not subject to any prohibition on dealing ahead of the dissemination of investment research we will not seek to take any advantage before providing it to our clients. Pepperstone doesn’t represent that the material provided here is accurate, current or complete, and therefore shouldn’t be relied upon as such. The information, whether from a third party or not, isn’t to be considered as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product or instrument; or to participate in any particular trading strategy. It does not take into account readers’ financial situation or investment objectives. We advise any readers of this content to seek their own advice. Without the approval of Pepperstone, reproduction or redistribution of this information isn’t permitted.