An index that is composed of securities that are meant to represent a particular sector or industry. In other words, such an index consists of a small number of securities and is designed to isolate the performance of a consistent group of securities, whereby avoiding overlap with other groups with diverse sectoral backgrounds. Examples of narrow-based indexes (NBIs) include airline, technology, or telecom sectors. By nature, a narrow-based index is more volatile than a broad-based index due to the small number of components and the consistent characteristics of these components.

A narrow-based index gauges investors’ sentiment regarding the state of a specific market sector.