Measures of the market

If you invest in stocks or own shares in a mutual fund that invests mainly in stocks, you probably have an interest in what 'the market' is doing. But what exactly do people mean when they talk about 'the market?' There are many indexes that measure activity in the various stock markets. Some assess the activity of a few companies while others take a much broader approach. Some of the more popular indexes in the United States are the Dow Jones Industrial Average, Nasdaq®, the S&P 500®, the Russell 2000® and the Wilshire 5000® Indexes. A well known measure of foreign stocks is the MSCI EAFE Free® Index. While there are a number of mutual funds that attempt to mirror the performance of a given index, it is not possible to invest directly in an index.

The Dow Jones Industrial Average
The Dow Jones Industrial Average (DJIA) is the oldest market indicator in the United States and is comprised of 30 blue chip companies. Each company in the DJIA has sales of over $7 billion each year. The DJIA was developed in 1896 by Charles Dow, a co-founder of the Wall Street Journal, to provide market data to his readers. The price-weighted average was determined by taking the price of each company's stock and dividing by the number of companies. That approach is still used today, but the divisor is adjusted to preserve historical continuity.

Originally consisting of 12 industrial companies, the DJIA was increased to 30 companies in 1928. Only one of the 12 original companies is included in the DJIA today, General Electric. Other companies include Microsoft, Intel, Johnson & Johnson and Exxon-Mobil

To be included in the DJIA, a company must have a history of substantial growth and a wide interest among investors. The most recent change to the 30 companies occurred in 1999 when four companies changed. Prior to that, the index was changed in 1997. Dow Jones & Company also has the Dow Jones Transportation Averages and the Dow Jones Utilities Averages.

NASDAQ®
The NASDAQ National Market Index tracks the more than 5,000 companies listed on the NASDAQ Stock Exchange and includes domestic and non-US companies of varying sizes. Each company represented in the index is weighted based on its market value. Many of the companies represented in the Index are associated with technology and other highly speculative areas. The NASDAQ 100 Index tracks the top 100 companies in the NASDAQ Index.

Originally called the National Association of Securities Dealers Automated Quotation, the NASDAQ was the first electronic stock market. It has been in operation since 1971. The broad-based NASDAQ Index is calculated throughout the day and is one of the most widely quoted of the major indexes.

S&P 500® Index
As the name implies, the Standard & Poor's 500 Index tracks the 500 most widely held US-based common stocks. It is a market-value weighted index that does not contain foreign-based companies. The diverse collection of companies listed in the S&P 500 include Microsoft, General Electric, Cisco and Wal-Mart. While the Index tracks only 500 companies, those companies account for over 70 percent of all capitalization of the US equity markets. As of September 30, 2007, the weighted average market cap of the S&P 500 was $108.85 billion.

The Standard and Poor's Index Committee meets at least once a month to review the index and determine if a company should be considered for inclusion or removal. Because inclusion and removal can have a great effect on the index, the Committee completes an extensive review process before such decisions are made.

The State Farm S&P 500 Index Fund attempts to mirror the returns of the S&P 500 Index¹. Assets of the Fund are invested in a master fund called the S&P 500 Index Master Portfolio that is advised by Barclays Global Fund Advisors ('Barclays'), a subsidiary of Barclays Global Investors, N.A. The stocks held by the master fund are purchased in amounts that reflect the weighting of those companies within the Index.

Russell 2000® Index
The Russell 2000 Index tracks the performance of the smallest companies contained in the Russell 3000® Index.  As of November 30, 2007, the average market capitalization of companies represented in the Index is $1.38 billion, with the largest company having $7.56 billion in market capitalization. Because the Index focuses on so many smaller companies, it is highly diversified. However, by concentrating on smaller companies, the Russell 2000 Index is also very volatile.

Companies included in the Russell 2000 Index are re-evaluated annually based on their market capitalization on May 31. Any resulting changes to the index will occur on June 30.

The State Farm Small Cap Index Fund attempts to mirror the performance of the Russell 2000 Index². Northern Trust is the sub-advisor for the Fund.

Wilshire 5000® Index
The Wilshire 5000 Index is also known as the Total Stock Market Index because it seeks to track nearly every publicly traded stock in the United States. At this time, the Index is comprised of close to 7,000 US-based companies and is the world's largest index in market value. The Index, created in 1974, is weighted by market value. In other words, the greater the value of the company, the more the stock will influence the index. The top 500 companies in the Index account for over 70 percent of the index value.

MSCI EAFE® Free Index
When created in 1969, the Morgan Stanley Capital International Europe Australia and Far East Free Index originally tracked stocks from 14 countries outside the United States. Today, it has grown to include companies in 21 countries. Because the Index includes companies throughout the world, there is a diverse selection of stocks. Of the more than 1,000 stocks represented, the greatest concentration is in European companies.

The MSCI EAFE Index is rebalanced on a quarterly basis. However, changes within a company such as a spin-off or acquisition may prompt an index change at any time.

The State Farm International Index Fund seeks to mirror the performance of the MSCI EAFE Free Index³. Northern Trust is the sub-advisor for the Fund.


¹ "S&P 500®" is a trademark of The McGraw-Hill Companies, Inc. and has been licensed for use by the State Farm Mutual Fund Trust. The State Farm S&P 500 Index Fund (the "Fund") is not sponsored, endorsed, sold or promoted by Standard & Poor's and Standard & Poor's makes no representation regarding the advisability of investing in the Fund.

²The Russell 2000® Index is a trademark/service mark, and RussellTM is a trademark of the Frank Russell Company. The State Farm Small Cap Index Fund (the "Fund") is not sponsored, endorsed, sold or promoted by, nor in any way affiliated with the Frank Russell Company. Frank Russell Company is not responsible for and has not reviewed the Fund nor any associated literature or publications and Frank Russell Company makes no representation or warranty, express or implied, as to their accuracy, or completeness, or otherwise.

³The EAFE® Free Index is a trademark, service mark and the exclusive property of Morgan Stanley Capital International, Inc. ("MSCI") and its affiliates and has been licensed for use by the State Farm Mutual Fund Trust (the "Trust"). The State Farm International Index Fund (the "Fund"), based on the EAFE® Free Index, has not been passed on by MSCI as to its legality or suitability, and is not issued, sponsored, endorsed, sold or promoted by MSCI. MSCI makes no warranties and bears no liability with respect to the Fund. MSCI has no responsibility for and does not participate in the management of the Fund assets or sale of the Fund shares. The Trust's Prospectus contains a more detailed description of the limited relationship MSCI has with the Trust and the Fund.

There is no assurance that the Funds will achieve their investment objectives. Investment return and principal value will fluctuate and Fund shares, when redeemed, may be worth more or less than their original cost. Investing in international markets involves certain risks not typically associated with investing in the United States, including foreign currency fluctuations and economic or political risks. Investment in smaller companies presents a greater risk of loss than investment in large companies.

It is important to note that there is market risk involved when investing in mutual funds, including possible loss of principal.

State Farm VP Management Corp Risk/Important Disclosures. State Farm Mutual Funds Prospectus. The State Farm College Savings Plan Enrollment Handbook (PDF 390 KB) .

AP2008/01/9820