John Dorfman, Contributor
Sept. 23, 2024
You probably hear about the Dow Jones Industrial Average every day, but how much do you really know about it?
Q. What is the Dow Jones Industrial Average anyway?
A. It’s a venerable U.S. stock-market index, that Charles Dow invented in 1896. It comprises 30 stocks, which the selection committee at Dow Jones & Co. (now part of News Corp.) considers to be leaders in their industries.
Q. Was it always 30 stocks?
A. When Charles Dow invented the index, it contained only 12 stocks. Some of the original stocks were American Cotton Oil Co., American Sugar Refining Co., Chicago Gas Co., National Lead Co. and United States Leather Co.
Many of the original 12 merged into other companies and none of them are still in the index.
A Quaint System
Q. Are the stocks equal-weighted in the index?
A. Not at all. They are weighted according to each stock’s price. That’s because the index was created before there were computers. Charles Dow added up the 12 prices and divided by 12.
As a result of this quaint weighting system, Goldman Sachs (GS), with a stock price of $498.93 as of September 21, has about ten times the weight of Verizon (VZ), with a stock price of $44.33.
Unscientific? You bet. Most modern stocks indices, such as the Standard & Poor’s 500, are weighted according to each stock’s market value.
History and Tradition
Q. Then why do people still pay attention to the Dow industrials?
A. Professionals mostly use the S&P 500. But the Dow carries an aura of familiarity, history and tradition. Also, it’s nice to be able to research stocks (even if in a crude fashion) before 1923 when Standard & Poor’s started to publish an index.
Q. What’s the highest weighted stock in the Dow?
A. At the moment, it is UnitedHealth Group Inc. (UNH), with a stock price of $575, giving it an 8.9% weight in the average.
Q. What’s the most lightly weighted stock?
A. Intel Corp. (INTC), priced at $21.84, for a 0.34% weight.
Q. Is the word “industrial” in the index’s title misleading?
A. A bit. For Dow index purposes, if a stock isn’t a utility or transportation stock, it’s an industrial.
Dow Theory
Q. What is Dow Theory?
A. The theory postulates that a market advance is sustainable if, and only if, the Dow Jones transportation average (which Charles Dow invented in 1884) “confirms” a rise in the Dow Industrials.
I’m a bit skeptical of the theory. Services are now a big part of the economy, reducing the importance of transportation.
Q. How often do the components of the industrial average change?
A. In 130 years, the Dow Jones selection committee has changed the components of the average 58 times. In most cases, more than one stock was replaced. Thus, the average has 30 current members and (if my count is correct) 111 former members.
Q. What are the most recent changes?
A. This year, Amazon.com Inc. (AMZN) was added and Walgreens Boots Alliance Inc. (WBA) was dropped.
In 2020, the selection committee added Amgen Inc. (AMGN), Honeywell International Inc. (HON) and Salesforce Inc. (CRM) to the average, eliminating Exxon Mobil Corp. (XOM), Pfizer Inc. (PFE) and Raytheon Technologies Corp. (RTX).
Discarded Stocks
Q. Do stocks dropped from the Dow Jones Industrial Average usually flop?
A. Not at all. In fact, during the past 25 years, stocks kicked out of the average has outperformed their replacements.
General Electric Co., which was one of the index’s original members, has revived its fortunes (and split into three successor companies) since it was booted in June 2018.
GE was replaced by Walgreens Boots Alliance, which has fallen 84% in the past five years and was itself kicked out in February 2024.
By John Dorfman, Contributor
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