While it’s the oldest and most familiar index, the Dow Jones Industrial Average is not the largest and, due to the way it weights its companies and to the limited amount of companies it represents, it may not provide the best representation for how the U.S. stock markets are faring.
With only 30 stocks, all of them blue chip industrials, the DJIA includes familiar companies like Johnson & Johnson, Coca-Cola and McDonald’s. By contrast, the S&P includes 500 companies with a market cap of $5.3 billion or more.
Historically, the Dow and the S&P have been almost perfectly correlated, meaning they move in the same direction on virtually every trading day. Recently, though, the two indices have been tracking differently, with the S&P 500 YTD returns around 7.41% relative to the Dow at 4.28%, according to Factset.
The two indices weight their companies differently, with the S&P weighting by market cap, meaning that bigger companies make up more of its value, and the Dow weighting by price, meaning that a change in the price of one stock has the same impact to the Dow as a change in the price of another. The prices are equally weighted on the Dow.
A third index we track closely is the Nasdaq Composite, which includes more than 3,000 stocks that are weighted by market capitalization. More than half of the companies listed on the Nasdaq are tech stocks, and, unlike the Dow and the S&P, the Nasdaq includes some foreign-based companies.
All three indices have enjoyed unprecedented success in recent years. According to MarketWatch, since March 9, 2009, which marked the low of the financial crisis and which many consider the birth date of the current bull market, the S&P has advanced 320%, the DJIA has risen 290% and the Nasdaq is up has soared 520%.