How to choose the four major US stock indices? A guide to investment strategies

The reason why the US stock market attracts global capital lies in an important factor: The US stock market index system is very comprehensive. Unlike other countries that only have one main index, the US has multiple indices with distinct characteristics due to its numerous listed companies and diverse industries. To gain a foothold in the US stock market, you first need to understand what these indices represent.

Why are there four major US stock indices instead of just one?

A country’s main index is like an economic health report, reflecting the overall market condition. The Nikkei index represents Japan, the Shanghai and Shenzhen 300 represent China, but what about the US? The answer is: The US stock market is too large for a single index to encompass.

The Dow Jones Industrial Average, S&P 500, Nasdaq Composite, and Philadelphia Semiconductor Index each serve their own purpose, mapping the US economy from different angles. Investors should choose the most suitable index to track based on their investment goals and risk tolerance.

The four major indices at a glance

Dow Jones Industrial Average (US30): Established in 1896, it is the oldest index, composed of 30 large-cap blue-chip stocks. Because it uses a price-weighted method, high-priced stocks have more influence. While representative, its coverage is narrow. Apple, Microsoft, Disney—these traditional giants are included.

S&P 500 (US500): Launched in 1957, it includes 500 stocks across various industries, accounting for about 75% of the total US stock market capitalization. Due to its broad and carefully selected components, it is considered the best “barometer” of the US economy. For long-term US stock investment, this index is the first choice.

Nasdaq Composite (NAS100): Born in 1971 on the electronic exchange, it has over 3,000 components, with technology stocks dominating. Since Taiwan’s electronics sector is well-developed, Nasdaq’s movements are strongly correlated with Taiwan stocks, making it a key indicator for Taiwanese investors.

Philadelphia Semiconductor Index: Established in 1993, it includes only 30 semiconductor companies and is highly specialized. With the explosion of AI and cloud demand, this index’s importance is increasing daily. TSMC, Intel, Micron are among its components, profoundly impacting Taiwan stocks.

How to invest in US stock indices? Comparing three tools

ETF: Suitable for passive, dollar-cost averaging investment

The concept of index funds (ETFs) is simple: they are configured according to the index’s components, so buying one ETF equals buying the entire index. Advantages include low fees and risk diversification; disadvantages are no leverage and only long positions, no shorting.

If you’re a small investor or a beginner, regularly investing in ETFs monthly is a prudent approach. There are many US stock market ETFs available, and trading is very convenient.

Futures: High leverage but also high risk

Futures trading involves margin deposits, aiming to profit from price differences. US stock index futures are typically settled every three months, with the notable feature of offering leverage of 20x or even 35x.

It sounds attractive, but this is a double-edged sword. Since US stock futures have no daily price limits, a wrong prediction can lead to liquidation. Only experienced traders should consider futures.

CFDs: Flexible short-term trading option

Contracts for Difference (CFD) sit between ETFs and futures. Compared to futures, CFDs have lower entry barriers (starting at $100), high leverage (up to 200x), no expiration date, making them more suitable for short-term traders seeking quick profits.

The biggest advantage of CFDs is the ability to set stop-loss and take-profit orders instantly, allowing active risk management. The downside is paying overnight fees, and platform selection should be based on proper regulation.

Investment principles for US stock indices

No matter which index you choose, the core logic remains: As long as the US economy continues to grow, the indices will rise. The S&P 500 especially has an “automatic elimination mechanism”—poorly performing companies are removed, and emerging strong companies are added. You don’t need to worry about individual stock risks; just trust the country’s economic outlook.

This is also the investment strategy endorsed by Warren Buffett: long-term dollar-cost averaging into major indices to enjoy the benefits of economic growth. In ten years, as long as the total US market cap exceeds today’s, investors will profit.

Short-term traders can leverage futures or CFDs’ two-way trading and leverage to arbitrage; long-term investors can accumulate wealth gradually through regular ETF investments. The choice depends on your understanding of the market and risk tolerance.

Conclusion

US stock market indices are a barometer of global economic health, and paying attention to them is worthwhile regardless of the market you invest in. The four major indices each have their focus: Dow for blue chips, S&P for the overall picture, Nasdaq for tech, and Semiconductors for chips. Choosing the right index and tools based on your investment goals and time horizon is more important than blindly following trends.