Equity Indexes

Updated for the 2026-2027 CFA® Level I curriculum.

An equity index tracks the performance of a defined group of stocks. The group a provider chooses to include, and the rules used to choose it, determine what the index actually measures.

CFA Level I tests whether you can identify what type of equity index a description represents and explain how its scope differs from other equity indexes. After this note, you should be able to classify an equity index by its coverage and constituent rules.

Key Takeaways About Equity Indexes

• An equity index is defined by its target market and the rules used to select constituents.

• Broad market indexes represent most of the investable equity market in one country.

• Multi-market indexes combine equity markets from more than one country or region.

• Sector indexes track a single industry or economic sector, such as energy or health care.

• Style indexes group stocks by shared characteristics, most often value, growth, or size.

• The same stock can appear in a broad market index, a sector index, and a style index at the same time.

• Reading an index description carefully tells you its geographic scope, size range, sector focus, and style tilt.

What You Need to Know for CFA Level I

• Identify the four main types of equity indexes: broad market, multi-market, sector, and style.

• Explain how geographic scope, market capitalization, sector classification, and style factors change what an index covers.

• Interpret what an equity index represents based on its stated target market.

• Classify an unfamiliar equity index correctly from a written description on the exam.

• Distinguish equity index type from index construction or weighting method, which is a separate topic.

Types of Equity Indexes

CFA Level I groups equity indexes into four types based on the scope of stocks they cover.

#1 Broad market index

A broad market index covers most of the investable equity securities in a single market. It is meant to represent that market's overall performance. A broad market index typically includes stocks across many sectors and size ranges within one country.

#2 Multi-market index

A multi-market index combines equity markets from more than one country or region. It can cover a group of developed markets, a group of emerging markets, or a mix of both. A multi-market index answers a different question than a single-country index: how did a group of markets perform together, not how did one market perform.

#3 Sector index

A sector index tracks companies in one industry or economic sector, such as financials, technology, or consumer staples. Sector indexes let analysts isolate performance driven by industry-specific factors rather than broad market movements.

#4 Style index

A style index groups stocks by a shared investment characteristic. The most common style factors are value versus growth and market capitalization (large-cap, mid-cap, small-cap). A style index can be built from stocks within a single country or across multiple markets.

How Equity Index Scope and Constituent Selection Can Differ

Two equity indexes can hold very different stocks even if both claim to represent "the equity market." Four factors drive that difference.

#1 Geographic scope

An index provider decides whether the index covers one country, one region, or the whole world. A single-country index and a multi-market index can hold zero overlapping constituents.

#2 Market capitalization range

Some indexes include only large companies. Others target mid-cap or small-cap segments. A broad market index may set a minimum size threshold that excludes very small companies.

#3 Sector or industry classification

Sector indexes rely on a classification system that assigns each company to one industry group. A company is included in a sector index only if it fits that sector's definition, regardless of its size or country.

#4 Style characteristics

Style indexes use financial ratios or growth metrics, such as price-to-earnings, price-to-book, or earnings growth rate, to sort stocks into value or growth categories. Two stocks in the same sector and country can end up in different style indexes because their financial characteristics differ.

Because these four factors can combine in any order, a single stock often belongs to several equity indexes at once. A large technology company headquartered in one country could sit inside a broad market index, a sector index, and a growth style index simultaneously.

How to Interpret What an Equity Index Represents

An equity index represents only its defined target market, nothing more. Before drawing a conclusion from an index's performance, identify three things:

1. what universe of stocks it draws from

2. what selection rule filters that universe

3. and what size or style limits apply.

A sector index that rises sharply tells you that one industry performed well. It does not tell you how the broad market performed. A style index built from value stocks tells you how companies with certain financial characteristics performed, not how growth stocks in the same market performed.

This distinction matters most when comparing index returns across different index types. Comparing a sector index return to a broad market index return without adjusting for scope leads to a flawed conclusion about market conditions.

How to Identify an Index Type from a Description

Use a short set of questions when a CFA exam item describes an index without naming its type directly.

1. Does the description mention one country or many? One country points toward a broad market index. Many countries points toward a multi-market index.

2. Does the description name a single industry? If so, it is a sector index regardless of country count.

3. Does the description mention value, growth, or a size range like large-cap or small-cap? If so, it is a style index.

4. Does the description mention broad coverage across industries and sizes within one market, with no style or sector filter? That points to a broad market index.

Apply these questions in order. A description naming both a single sector and a value tilt describes an index with both a sector and style filter, but for classification purposes on Level I, the primary filter named in the question stem usually determines the correct answer choice.

Worked Example

An index provider publishes three new equity indexes.

Index A includes common shares of companies headquartered in three Southeast Asian countries, with no restriction on sector or company size.

Index B includes only common shares of companies classified in the health care sector across a single country's exchanges.

Index C includes common shares of companies in one country with a price-to-book ratio below the market median and earnings growth below the market median.

Step 1: Identify the geographic scope of each index.

Index A spans three countries. Index B and Index C are both limited to one country.

Step 2: Identify any sector or style filter.

Index B is filtered by sector (health care). Index C is filtered by style characteristics (low price-to-book and low earnings growth, both markers of value stocks).

Step 3: Classify each index.

Index A is a multi-market index because it combines equity markets from more than one country with no sector or style filter.

Index B is a sector index because it is limited to one industry.

Index C is a style index because it is filtered by value characteristics.

Three indexes can share the same provider and launch date but represent completely different investment exposures. Index A measures a regional market. Index B measures one industry. Index C measures a value-oriented subset of one market. None of the three returns can substitute for the others.

Common Exam Traps

Confusing sector index with style index

A sector index is defined by industry classification. A style index is defined by financial characteristics like value or growth. A health care index is a sector index even if most health care stocks happen to be growth-oriented.

Assuming broad market means global

A broad market index usually refers to one country's market, not the entire world. A global index is a type of multi-market index, not a synonym for broad market.

Memorizing the four labels without applying them

The exam usually describes an index rather than naming its type. Candidates who only memorize definitions without practicing classification from a description often pick the wrong answer under time pressure.

Treating index type as index construction

Index type describes what the index covers. Weighting method (price, market-cap, or equal weighting) describes how constituent returns are combined. These are two separate ideas tested in different parts of this reading.

Practice Questions

An equity index includes common shares of companies from Canada, Germany, and Japan. The index applies no restriction based on sector, company size, or style characteristics. Which type of equity index does this describe?

1. Broad market index

2. Multi-market index

3. Sector index

FAQs About Equity Indexes