The dow Jones industrial average has seen the rise and fall of the us economy and the financial sector, but in recent years it has been questioned by the industry. Is it fair?
Since the start of the year, the nasdaq is up 4.1%, the s&p 500 is down 8.5%, and the dow Jones industrial average has posted the worst return, down 12.4%, through May 26.
In recent years, there has been a lot of skepticism about the dow Jones industrial average.So is it fair to blame the dow?
Let's start with the question: why has the dow outperformed the nasdaq and the s&p 500 this year?In short, there are two reasons:
First, the dow has a big position in the stock - Boeing.Before Boeing's share price collapsed this year, it had a weighting of about 9% in the dow (it now has a weighting of about 4%).The impact of this year's covid-19 outbreak, coupled with safety issues with its previous 737 MAX models, has severely affected Boeing's stock price.Boeing shares are down about 55% since the start of the year, one of the main culprits in the dow's poor performance.
Second, the technology stocks that have done well this year are low on the dow and not even included in the index.A classic example is amazon.Amazon has been a big winner in the covid-19 pandemic, with its shares up 31% since the start of the year.However, amazon's stock now trades at more than $2,400, which poses a problem for the dow Jones industrial average.
The dow's most heavily weighted stock is apple, which trades at more than $300 and has a weighting of about 8.7%.Since the dow is calculated by price weighting, if amazon were included in the dow, amazon would have eight times the weight of apple, or more than 60%, based on its price being about eight times that of apple.It is clearly not acceptable for the dow to become the dominant amazon.In fact, apple and amazon have similar market values, both around $1.2 trillion.It doesn't make sense to give them very different weights based solely on their share prices, which highlights the flaws in the way the dow is calculated.For lack of a better way to deal with the problem, the dow Jones industrial average simply excluded amazon, so it didn't get the benefit of amazon's rising stock price.
As a result of the above mentioned flaws, the industry's attitude towards the dow and the s&p 500 index, showing a double-whammy attitude.By the end of 2019, according to standard & poor's, the world's assets, which are based on the s&p 500 index, totaled about $11.2 trillion.By comparison, assets based on the dow Jones industrial average are about $31.5 billion, or just 0.3 percent of that.An index fund that tracks the s&p 500 now stands at about $4.6 trillion, more than 160 times the size of the $28.2 billion index fund that tracks the dow Jones industrial average.So, in fact, the dow's impact on the market is more about its history and popularity than it is about its real impact on money flows and trading volumes.
What does the dow Jones industrial average's predicament tell us?
First, want to beat the market through stock selection, is very, very difficult.The dow Jones industrial average consists of 30 stocks, handpicked by the index committee with the goal of selecting 30 industrial stocks that represent fundamentals of the U.S. economy.The criteria for which stocks in which industries are more representative of an economy are highly subjective.If you err on the side of judgment, you can miss out on industries and companies that are revolutionizing the market.
For any individual retail investor, our own selection of investment portfolio, generally only about a dozen to 20 stocks.Few people have the energy and knowledge to scrutinize and track more stocks.Because of the limited number of stocks in the portfolio, a slump in any one stock, like Boeing's, could be a big drag on portfolio returns.In this logic, the challenges facing stock pickers and the dow Jones index committee are similar.
Second, the price-weighted index has its obvious defects.The most influential price-weighted index in the world at present, besides the dow Jones, is the nikkei 225 index of Japan, nothing more.The other most influential indices, be they America's s&p 500, nasdaq or China's csi 300, are all market-weighted.If most stocks are priced the same, there is little difference between a price-weighted index and a market-weighted index.But in reality, management at different companies makes different choices.By price-weighted standards, Mr Buffett's Berkshire hathaway a-shares will never be included in the index because their unit price is too high.The same reason would exclude high-priced stocks like amazon and Google, which could exclude the right stock members for the wrong reasons.
Thirdly, from the perspective of industry weighting, the weight of science and technology in the dow Jones index is relatively low, while the weight of industry other than science and technology is relatively high.Since the start of the year, the dow has underperformed the nasdaq by about 16%.This difference highlights the current tension between different industries in the us economy under the impact of covid-19.Technology companies, such as Google, amazon and Microsoft, are the big winners from the epidemic. They are not affected by the unemployment wave and the economic recession, but they are stronger.But in the real economy, there are countless industries and companies that have been hit by the epidemic.By that measure, the dow, with its low tech weighting, is more representative of the real economy.Apart from Boeing, dow components such as 3M, a manufacturer, Disney, a media group, and chevron, an oil company, have all seen their share prices fall, which may be a truer picture of America's real economy.
The dow Jones industrial average is the oldest stock index in the United States.It has been more than 120 years since Charles dow founded it in 1896.By contrast, the s&p 500, the most widely used in the industry, was launched in 1957, more than 50 years after the dow.It is no exaggeration to say that the dow Jones index has witnessed the rise and fall of the American economy and the financial industry.Looking ahead, it will be interesting to see if the dow can continue its former glory.