How Do You Compare Two Funds That Use Different Benchmark Indexes?
It’s tempting to line up two funds’ returns side by side and call it a fair comparison, but if each fund measures itself against a different benchmark, that comparison may be shakier than it looks. The two funds could be answering entirely different questions, even if their category labels sound nearly identical.
The short answer
Comparing funds that use different benchmarks means looking past the benchmark labels and examining what each fund actually holds, its sector weights, its typical company size, and its overall approach, rather than assuming the benchmarks themselves are interchangeable. A fund’s return only means so much without understanding what kind of market segment or strategy it was actually trying to represent.
Why benchmarks differ in the first place
Funds choose benchmarks that are supposed to reflect their strategy, but indexes built to represent a similar-sounding category can differ in meaningful ways, such as how they weight companies, which company sizes they include, or how frequently they’re reconstituted. Two funds both described as growth funds might be benchmarked against different growth indexes that define growth somewhat differently, which means their returns aren’t automatically measuring the same thing. Even index providers with similar names can construct their indexes with different rules for company selection, weighting, and rebalancing frequency, and those construction choices ripple through to how a fund tracking that index actually performs.
Look at what’s actually inside
Rather than relying on benchmark names, comparing the underlying holdings of two funds, their sector weights, average company size, and geographic exposure, gives a clearer sense of whether they’re truly playing in the same space. Checking each fund’s R-squared against its own stated benchmark is also useful here, since a low reading suggests the fund doesn’t track that benchmark closely anyway, which weakens any comparison built around it. It’s a reminder that the benchmark listed in a fund’s materials is a reference point chosen by the fund itself, not necessarily the most accurate description of what it holds.
Watch for style and size drift
Funds can drift from their original benchmark over time as managers adjust holdings, a pattern sometimes called style drift. A fund benchmarked against a broad market index might, in practice, behave more like a sector fund if it has become heavily concentrated in one part of the market. Comparing recent holdings rather than relying only on the benchmark label helps catch this kind of drift before it distorts a comparison. A fund’s category and benchmark listing might not update as quickly as its actual portfolio does, so the most current holdings tend to be the more reliable source.
A more level way to compare
One practical approach is to compare both funds against a single, broad, widely used benchmark in addition to their own stated ones, purely as a common reference point. This doesn’t replace understanding each fund’s actual strategy, but it offers a shared yardstick that isn’t tied to either fund’s own marketing. Pairing that with a look at expense ratios and portfolio turnover rounds out a comparison that goes beyond which benchmark sounds most similar.
The takeaway
Different benchmarks don’t make two funds impossible to compare, but they do mean the comparison needs to happen at the level of actual holdings and strategy rather than headline returns measured against different yardsticks. Looking under the hood, rather than trusting the label, is what makes the comparison meaningful, and it’s a habit worth applying any time two funds are described in similar terms but measured against different yardsticks.