The Dow Jones Industrial Average (DJIA) is a famous stock index that tracks 30 large, U.S.-based blue-chip companies. The index is managed by S&P Dow Jones Indices, which is controlled by S&P Global. Investors and analysts rely on the index to reflect the health of the U.S. stock market and broader economy.
The Dow Jones Industrial Average, Dow Jones, Dow 30, DJIA or simply “the Dow,” is a price-weighted stock market index. The index is the smallest and most exclusive of the major indices, tracking just 30 large, publicly-owned blue chip stocks.
The Dow is a widely-watched benchmark that doubles as a proxy for the health of the U.S. markets and economy. The bulk of its stocks trade on the New York Stock Exchange (NYSE), though it also pulls from the Nasdaq.
To ensure its relevance, the index is updated every few years to replace irrelevant firms or correct imbalances. The Dow’s holdings represent every sector except utilities and transportation, which are measured by other, more specific indices.
The Dow Jones was named for its creators Charles Dow and Edward Jones, two of the three financial journalists behind The Wall Street Journal. The index was born in 1896 to provide a quick gauge of how the financial markets moved each day.
At its inception, the Dow was comprised of 12 stocks primarily in the industrial sector. These included energy firms, railroads, and some agricultural companies dealing in cotton, sugar and tobacco.
At the time, the industrial sector’s performance was tightly wound up in the economy’s overall growth rate. Over time, as the index’s focus shifted from industry to gauging the overall stock market, the Dow expanded in scope and number.
Since 1928, the DJIA has tracked 30 companies across sectors like tech, energy, finance and retail. The index changes every few years to reflect updated economic trends or remove underperforming firms.
The DJIA boasts a few notable date in its century-plus history, including:
The DJIA is unusual in that it’s weighted by price, rather than market cap. Simply put, that means that the Dow’s value is calculated by determining the average value of the stock prices of its listed components.
However, this isn’t a simple average – at least, not anymore.
At its inception, Charles Dow relied on a simple average for the index. All 12 stock prices were added together, then divided by 12.
The beauty of a simple average is its simplicity. But over time, Dow listings acquired, merged, and split their way into complexities that have to be accounted for.
Once it outgrew a simple average, the committee that oversees the Dow moved into a price-weighted scale, instead. Price-weighted models give more weight to stocks with higher share price, meaning that bigger moves in higher-priced stocks will have more impact on the Dow’s value.
To do so, the Dow relies on its famous “Dow Divisor.”
The Dow Divisor is a number that the Dow’s overseers use to determine the impact of a one-point move in each of the Dow’s 30 stocks. While the Divisor itself may change, its application remains the same. As of October 2022, the Divisor is 0.1492.
Using the Divisor is simple: to calculate the value of the Dow, simply add up the share prices of all 30 stocks, then divide by the Divisor.
In other words:
DJIA = (Sum of all 30 stock prices) / Dow Divisor
Using the Divisor ensures that a one-point move in any of the Dow’s stocks will move the index uniformly.
The Dow only contains 30 stocks at a time, with additions and subtractions made every 2-5 years or so.
Uniquely, the Dow’s components aren’t selected by formula, but by a committee of Wall Street Journal editors. The committee makes decisions based on a loose set of guidelines, which include:
As a result of these guidelines, most – or all – of the stocks in the Dow at any given point tend to be blue-chips. They may span a range of industries, from tech and energy to finance and healthcare.
And though the Dow’s focus is narrower than the S&P 500 or Nasdaq Composite, its long-term performance is often similar.
A company’s financial performance, sector and relevance all factor into how long it remains part of the Dow. The index’s overseers regularly reevaluate and replace companies that no longer meet listing guidelines or serve its purpose.
Leading up to the Great Depression, the Dow changed multiple times, eventually growing to 30 stocks. Then, in 1932, eight stocks were replaced in a short span.
The 1990s saw several more massive changes, with four stocks replaced in both 1997 and 1999. During this period, several big names were added, including Johnson & Johnson, Intel and Microsoft.
In 2018 and 2019, Walgreens Boots Alliance joined the club, replacing General Electric. Two years later, ExxonMobil, Pfizer and Raytheon Technologies were dropped in favor of Salesforce, Amgen and Honeywell.
The DJIA technically bears a ticker: DJI. However, it’s not exactly a tradable stock – the ticker exists so traders and analysts can quickly assess the market’s performance.
If you want exposure to the Dow, you’ll have to invest in its component parts directly. You can do this by snapping up partial or whole shares of each of the 30 stocks in its composition.
Alternatively, you can buy into Dow-tracking ETFs or mutual funds, such as the SPDR Dow Jones Industrial Average ETF. Bear in mind that most fund-based investments carry an expense ratio, though index-tracking ratios tend to be fairly small. (Often under 0.25%.)
A third option is to invest in Dow-based options or futures contracts. However, these investments tend to be tricky and best-suited for advanced investors.
After the initial pandemic crash and recovery, the Dow’s blue-chip composition buoyed its performance. That remained true even after the S&P 500 and Nasdaq Composite slipped into their respective bear markets in 2022, spurred by investors fleeing from high inflation and declining corporate earnings.
In fact, the Dow held off its post-pandemic bear market until September 26, 2022, when the index fell 20% below recent highs. Just a few days prior, a month of consistent losses saw the index dragged below 30,000 for the first time since mid-June.
The following week, the Dow slumped below 29,000 points for the first time since November 2020, erasing nearly two years of gains. On a quarterly basis, the index shed 6.7%, marking the first time it faced three consecutive quarterly losses since 2015.
However, the Dow clawed back its losses in the first half of October 2022, climbing above the 30,000 mark again. A market-wide relief rally, ushered along by the prospect of slowing inflation, kicked off the recovery.
As of (time) on October (date), 2022, the Dow Jones Industrial Average sat at (number) points. That represented a (number)% increase for the day, and a year-to-date loss of (number)%.
Overall, the Dow remains down from 2021’s record highs – though not nearly as far as its peers.
Because the Dow invests primarily in large, stable blue-chip stocks, you could consider it an ideal equity index for recessions.
Its component parts tend to be masters of their industry with pockets deep enough to ride volatility better than smaller, riskier companies. Additionally, their sheer size and importance means it’s easier to recover when the recession ends.
Many Dow darlings also pay substantial dividends. Though dividends don’t negate portfolio losses 100%, they cushion the blow. And participating in a DRIP means your dividends will buy more shares while they’re cheap, leaving room for growth later.
For its importance, the Dow isn’t without criticisms.
To start, because it’s a price-weighted index, the Dow can be greatly impacted by activities like mergers and stock splits. That also means that stocks with higher share prices have the greatest influence, regardless of company size.
Due to the Dow’s small size and scope, some economists argue that it can’t accurately represent financial markets or the broader economy. Its limited reach also means that it’s easy for one company to overrepresent its sector.
For these critics, the heftier S&P 500 makes a better benchmark index. Still, that doesn’t stop analysts or investors from turning to the Dow to measure financial health.
The DJIA serves as a common, albeit imperfect, gauge of the U.S. stock market and broader economy’s health. The 30 blue-chips that comprise the index provide a quick snapshot into past performance while allowing analysts and investors to make future predictions. And despite its limitations, the Dow remains one of the most-watched financial benchmarks in the world.
For investors who desire exposure to stable firms in a range of sectors, the Dow is a great place to start. That’s especially true if you want to center your portfolio around blue-chip companies with a history of long-term performance and growth.
And if you want to broaden your investment horizons a bit, Q.ai’s targeted, yet diversified, Investment Kits make a great place to start.
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