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What Is the Dow?

The Dow Jones Industrial Average (DJIA) is a stock market index that tracks 30 blue-chip companies trading on the NYSE and the Nasdaq. It’s often used as an indicator of the health of the U.S. equities market and the broader economy. 

🤔 Understanding the Dow

The DJIA, more commonly called “the Dow,” is the second-largest U.S. stock market index. It was designed by Charles Dow and Edward Jones in 1896 to serve as a proxy for the U.S. economy. At the time, it held 12 stocks primarily from the industrial sector, which was linked to the economic growth rate. 

Since its inception, the Dow has adapted and grown to compensate for a shifting economy. The modern iteration contains 30 blue-chip stocks from every industry except utilities and transportation. (These are measured by other indexes like the Dow Jones Transportation Average.)

How is the DJIA calculated?

The Dow also switched from a simple average to a weighted method that favors higher share prices. Currently, the index is calculated by adding all 30 stocks’ prices and dividing by the Dow divisor, which updates when the roster changes or a company’s stock splits. 

And, like the S&P 500, the Dow isn’t a stagnant index. Components (companies) may be replaced when they:

  • Experience significant financial incidents such as losing market capitalization
  • Become less relevant to current economic trends
  • Become less influential in their sector 

The most recent change occurred in 2020 when the index dropped ExxonMobil, Pfizer, and Raytheon Technologies. Salesforce, Amgen, and Honeywell were brought on to replace these iconic names. 

What this means for you

Over the Dow’s many iterations, the index has come to stand as a more diverse reflection of the U.S. economy. Many consider the Dow a crucial indicator of the U.S. equities market—and, by extension, the economy. Investors often rely on the Dow as a:

  • Gauge of their own portfolios’ performance
  • Method to monitor market conditions and identify trends
  • Historical record of investment trends and correlations
  • Way to obtain automatic diversification using blue-chip leaders

Limitations of the Dow

However, the Dow does have a few limitations. For instance, some investors believe that 30 stocks is far too few to accurately portray the equities market. (For reference, the U.S. alone lists over 4,000 public companies.) Others point out that price-weighted indexes favor companies with higher share prices over larger market caps.

Like other stock indexes, you can’t invest in the DJIA directly. But you can easily gain exposure to the index’s components by:

  • Buying individual or fractional shares of the Dow’s holdings
  • Investing in a Dow-focused ETF or mutual fund 
  • Trading in Dow options or futures contracts (note that these are typically considered riskier advanced instruments best suited for experienced investors)

Ultimately, for novice investors seeking to open their portfolio to large-cap stocks with solid track records, the DJIA makes a great place to start. 

Disclosures

Q.ai is the trade name of Quantalytics Holdings, LLC. Q.ai, LLC is a wholly-owned subsidiary of Quantalytics Holdings, LLC ("Quantalytics"). Quantalytics offers automated financial advice tools through Quantalytics Investment Advisors, LLC ("QAI"), an SEC-registered investment advisor. QIA’s investment advisory services are ONLY available only to residents of the United States. Disclosures concerning QIA’s investment advisory services are available on its Form ADV filed with the SEC. The content in this newsletter is for informational purposes only and does not constitute a comprehensive description of Q.ai's investment advisory services.

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