How To Benchmark Your ETF Investments

Exchange-traded funds (ETFs) have changed investing by offering diversification, low costs, and market access in a single investment vehicle. While many ETFs are designed to track specific indexes, simply owning an ETF doesn’t eliminate the need to measure its performance.

That’s where benchmarks come in. They help you assess the risk and returns of any fund you are considering. This guide will explore how to select and use them as you assess different ETFs.

Understanding ETF Benchmarks

A benchmark serves as a standard against which you can measure your ETF’s performance, helping you determine whether your investment is delivering the results you should expect. For example, if your ETF gained 8% last year, that might sound impressive—until you learn that similar ETFs averaged 12% during the same period. Conversely, a 3% return might seem disappointing until you discover that comparable investments lost ground in the same period.

Effective benchmarking involves more than just comparing raw returns. Risk assessment is equally important. A diversified ETF portfolio might be compared with a broad market index like the S&P 500 index for both the return captured and relative risk. Metrics like beta , commonly found on most investment sites today, help quantify this relationship—a beta of 1.0 indicates your ETF moves in tandem with its benchmark, while a beta of 0.7 suggests it will likely move up or down only 70% as much as the benchmark.

Types of Benchmarks

Here are the major benchmarks you’ll encounter:

Broad Benchmarks

S&P 500: The most widely followed benchmark today, the S&P 500 index measures the performance of 500 large U.S. companies weighted by market capitalization. It is used for broad-based U.S. large-cap ETFs like the SPDR S&P 500 ETF (SPY), which tracks it. In addition, many actively managed large-cap ETFs use the S&P 500 as their benchmark, hoping to outpace it.

An investor considering an actively managed large-cap ETF would typically compare its historical performance against the S&P 500 to determine if the fund’s strategy and management justify its higher expense ratio. This helps answer the question: Does the active management provide enough extra in returns to overcome the typically higher fees?

Dow Jones Industrial Average: Often referred to as “the Dow,” this price-weighted index consists of 30 large, blue-chip U.S. companies (see below). The Dow serves a benchmark for ETFs focusing on established American industrial leaders.

Nasdaq Composite: This technology-heavy index represents all companies listed on the Nasdaq stock exchange—over 3,000 constituents spanning technology, biotech, and growth-oriented companies. Unlike the S&P 500, the Nasdaq Composite includes many smaller and mid-sized companies alongside large-caps.

The Nasdaq serves as the primary benchmark for technology-focused ETFs like the Invesco QQQ Trust (QQQ), which tracks the Nasdaq-100 Index (the 100 largest nonfinancial companies on the Nasdaq). Many actively managed tech funds and growth-oriented ETFs also measure their performance against this index.

Small-Cap Benchmarks

Russell 2000: This index comprises 2,000 of the smallest companies within the broader Russell 3000 Index. If you’re holding small-cap ETFs, the Russell 2000 provides a good comparison, reflecting the performance of smaller firms with higher growth potential but greater volatility.

The table below includes other specialized and international equity benchmark indexes.

Fixed-Income Benchmarks

Bloomberg U.S. Aggregate Bond Index (AGG): This is the most widely used to check the performance of the U.S. investment-grade bond funds. It includes government, corporate, and mortgage-backed securities, making it suitable for ETFs like the iShares Core U.S. Aggregate Bond ETF (AGG).

In addition, those choosing among types of funds might compare benchmarks like the AGG against the S&P 500 index to see which types of funds—large-cap stocks or bonds—have done better over time.

Commodity Benchmarks

Commodity ETFs track specific tangible goods and require specialized benchmarks. For example, gold bullion prices serve as the benchmark for the SPDR Gold Trust ETF (GLD), designed to track the price of gold.

Cryptocurrency Benchmarks

For cryptocurrency ETFs like the iShares Bitcoin Trust (IBIT) and other spot bitcoin funds, the CME CF Bitcoin Reference Rate (BRR) is the benchmark.

Published by the CME Group, the BRR is calculated once daily at 4:00 p.m. London time, with additional reference points at the same time in New York and Hong Kong to account for global trading. These rates are derived from transaction data across major cryptocurrency exchanges, including Bitstamp, Coinbase, Gemini, and others.

Steps for Benchmarking Your ETF Investments

Follow these steps to effectively check how your ETF investments are performing against the right benchmarks:

1. Identify the Correct Benchmark

Start by determining which benchmark your ETF should be measured against:

• For passive ETFs, which simply mimic a major index, check the fund’s fact sheet to find the tracking index.
• For active ETFs, identify both the stated benchmark and any style-specific indexes that match the fund’s strategy. The fact sheet should generally include a benchmark, too.
• For specialized ETFs (sector, thematic, or alternative assets), look for benchmarks that align with the specific market segment.

2. Gather the Performance Data

Collect performance data for both your ETF and its benchmark:

• Use your brokerage platform or financial websites.
• Gather returns for multiple time frames: one month, three months, one year, three years, five years, and since inception.
• Include reinvested dividends in your calculations (total return).

3. Calculate Relative Performance

Compare your ETF’s returns against the benchmark:

• Subtract the benchmark return from your ETF’s return to find the performance gap.
• Example: If your ETF returned 7.5% and the benchmark returned 8.0%, the relative performance is -0.5%.

For example, someone interested in how well a fund that uses AI to pick stocks might compare the returns for Amplify AI Powered Equity ETF (AIEQ) vs. SPDR S&P 500 ETF Trust.

4. Assess Risk-Adjusted Performance

Look beyond raw returns to understand risk-adjusted performance:

• Find your ETF’s beta relative to its benchmark (available on most financial websites).
• Compare the return captured versus the risk taken (a fund with beta 0.8 capturing 80% of benchmark returns).

5. Account for Expenses and Tracking Error

Factor in costs when evaluating performance:

• Subtract your ETF’s expense ratio from the benchmark’s theoretical return.
• For a passive ETF with a 0.1% expense ratio tracking the S&P 500, expected performance would be the index return minus 0.1%.
• For active ETFs with higher fees, determine if the manager is adding enough value to justify the additional cost.
• For passive ETFs, check the tracking error (how closely it mimics the index’s performance)—the lower the tracking error, the better.

Evaluate how closely your passive ETF follows its benchmark:

• Calculate the standard deviation of the differences between ETF and benchmark returns.
• A lower tracking error indicates better index replication.

6. Review in Context

Interpret your findings within the proper context:

• Short-term underperformance may be insignificant and not warrant action.
• Consistent underperformance over multiple years might signal the need to consider alternatives.
• Compare your ETF against similar funds to determine if the issue is fund-specific or industrywide.

Passive vs. Active ETFs: Benchmarking Differences

Understanding the fundamental differences between passive and active ETFs is crucial for proper benchmarking:

The Bottom Line

Benchmarking is an essential part of ETF investing, making it clear whether your investments are delivering the value you’re paying for. Select benchmarks that align with your ETF’s specific focus, whether it’s the S&P 500 for large-cap funds, the Nasdaq Composite for tech-heavy portfolios, or specialized indexes for niche investments.