U.S. Markets: The Dow

As I mull over what my blog’s theme should be, Joe Kernen of CNBC’s SquawkBox rejoices at the rise of the U.S. markets in anticipation of December’s Consumer Price Index (CPI) reading. “The end of inflation is upon us,” many of his guests herald.

The thought then came to me – keep it simple stupid (KISS); write meaningful, relevant financial content to the audience who matters the most, the 99%.

The guests of SquawkBox continue their discussions. “The Dow is now up 200 points in pre-market trading,” Joe alerts viewers. The Dow Jones Industrial Average (DJIA); that was it; that was the subject with which I’d kick off my first blog series, U.S. Markets.

Originally founded in 1885 as Dow Jones Average (DJA), with ‘Industrial’ added in 1896, the DJIA is one of the oldest, most-watched U.S stock market indices, but few are familiar with its composition, let alone the price action behind its lofty ascent.

History

Charles Dow, for whom the index was named, published an index in an 1884 edition of Customer’s Afternoon Letter, the predecessor of The Wall Street Journal. His index comprised nine railroads and two industrial companies; the DJA was born. It debuted with a base point value of around 63 – compared to today’s DJIA at 34,302.61, every dollar invested in 1884 would be worth $553 today. Remind yourself of this simple facet whenever someone warns of an impending market crash.

If you still fret, continue to remind yourself that The Dow Jones has weathered: The Financial Panics of 1896, 1901, 1907, 1910, and 1911, World War I, the Post-World-War Recession, The Crash of 1929, The Great Depression, World War 2, The Korean War, The Cold War, The Assassination of President Kennedy, Stagflation of the 1970s, The Vietnam War, The Flash Crash of 1987, Collapse of the Soviet Union, The Dot-Com Bubble, The Financial Crisis of 2008, 2018 U.S. Chinese Trade War, The Covid Pandemic, Inflation of 2021, and countless recessions and wars to name. The Dow is a stalwart index in generational wealth creation for the United States, compounding annually at 5.3% during the 20th century. To achieve the same rate of return, The Dow would need to close at 2,000,000 on December 2099 to match the past century of returns. Considering all of the crises above, the feat is nothing short of remarkable. Powering that return have been some of the most iconic brands we’ve come to know.

Composition

For its nearly 140-year life, the DJIA has had many companies hallow its sacred halls. The trust operating the Dow rotates its components where necessary. Currently, the index comprises the 30 companies shown in the table below, designed to represent the broader U.S. economy. This small number of companies in The Dow contrasts sharply with larger indices like the S&P 500’s, ironically, 503 companies and the NASDAQ’s 100 components, which are still smaller than Russell’s 2,000 & 3,000 indices.

The Dow Jones Industrial Average only comprises large companies with market capitalizations in the range of $10 – $200 billion (large-cap); however, some, like Apple and Microsoft, command mega-capitalizations where values surpass $200 billion, commanding trillion-dollar valuations.

Company	Ticker	Sector	Date Added	Index Weighting
3M	MMM	Industrials	08/09/1976	2.49%
American Express	AXP	Financial Services	08/30/1982	2.99%
Amgen	AMGN	Healthcare	08/31/2020	5.22%
Apple	AAPL	Information Technology	03/19/2015	2.59%
Boeing	BA	Industrials	03/12/1987	4.11%
Caterpillar	CAT	Industrials	05/06/1991	4.97%
Chevron	CVX	Energy	02/19/2008	3.41%
Cisco	CSCO	Information Technology	06/08/2009	0.94%
Coca-Cola	KO	Consumer Discretionary	03/12/1987	1.18%
Dow	DOW	Industrials	05/06/1991	1.13%
Goldman Sachs	GS	Financial Services	04/02/2019	7.19%
Home Depot	HD	Consumer Discretionary	11/01/1999	6.36%
Honeywell	HON	Industrials	08/31/2020	4.16%
Intel	INTC	Information Technology	11/01/1999	0.58%
IBM	IBM	Information Technology	06/29/1979	2.80%
Johnson & Johnson	JNJ	Healthcare	03/17/1997	3.33%
JPMorgan Chase	JPM	Financial Services	05/06/1991	2.75%
McDonald’s	MCD	Consumer Discretionary	10/30/1985	5.17%
Merck	MRK	Healthcare	06/29/1979	2.16%
Microsoft	MSFT	Information Technology	11/01/1999	4.60%
Nike	NKE	Consumer Discretionary	09/20/2013	2.48%
Procter & Gamble	PG	Consumer Staples	05/26/1932	2.90%
Salesforce	CRM	Information Technology	08/31/2020	2.87%
Travelers	TRV	Financial Services	06/08/2009	3.73%
UnitedHealth	UNH	Healthcare	09/24/2012	9.41%
Verizon	VZ	Communication Services	04/08/2004	0.80%
Visa	V	Financial Services	09/20/2013	4.29%
Walgreens Boots Alliance	WBA	Healthcare	06/26/2018	0.71%
Walmart	WMT	Consumer Staples	03/17/1997	2.79%
Walt Disney Company	DIS	Communication Services	05/06/1991	1.91%

Table 1: The Current Dow 30 Components (As of: 1-16-23)

A Value-Oriented, Blue Chip Index

Do I invest in Growth or Value? This is a question that many have asked, and a question to which the answer depends on the individual, their circumstances, and perhaps even the economic outlook. If you’re looking for value, the DJIA certainly falls on the list with a value-tilt but still sports growth names. The index represents eight sectors: Consumer Discretionary, Consumer Services, Consumer Staples, Energy, Financial Services, Healthcare, Industrials, and Information Technology. This distribution of sectors is shown in the diagram below.

What’s the Deal with Points?

You’ll often hear commentators on Bloomberg, CNBC, etc. describe the movement of financial instruments, like the DJIA, by either its percentage or points changed, with the base value represented by points. So, what’s that all about?

Price-Weighted vs. Market-Weighted

The Dow’s point value and the distribution of its underlying 30 stocks differ from many other major indices. The Dow is a price-weighted index, meaning its point value is calculated by the stock price of its components and not by the component’s size; contrast this with the S&P, which is a market-weighted index. Before figuring the Dow’s value, it’s important to understand how this weighting impacts the underlying distribution in the fund. So what’s the difference?

Companies with larger market capitalizations are given greater weightings in a market-weighted index. In a price-weight index, like the Dow, the individual stock price of the components in the index determines its weighting.

For our discussion, let’s take the largest company in the United States, Apple, with a share price of $134.53 and a market capitalization of over $2 trillion. And now, let’s take UnitedHealth with a market capitalization of $457 billion, fetching a share price of $489.50.

In the S&P 500, Apple makes up roughly 6% of the entire index and UnitedHealth 1.36%. Compare that with the Dow, where Apple is only 2.59%, and UnitedHealth is 9.41%. UnitedHealth, a company roughly a quarter the size of Apple, is weighted nearly four times more than Apple in the Dow simply because its share price is higher. Whether an index should be market-weighted or price-weighted is a debate for another time. Taking our knowledge about price-weighted indices, we can discuss how the Dow’s total point value is calculated. (Hint: summing the component prices is only half of the equation)

The Dow’s Point Value

The DJIA, as of this writing, sits at 34,302 points. So a reasonable question is – how is that point value calculated? The point value of the index is the sum of its 30 components’ stock prices divided by a divisor, coined – The Dow Divisor.

The divisor was introduced as a way to normalize the DJIA price over time to account for numerous accounting activities such as stock splits and dividend payments. The divisor currently sits at around 0.1517.

Summing the above table’s prices yields a combined price of $5,204.65. Accounting for our divisor of 0.1517, we divide our sum of 5204.65 by the divisor.

We get a calculated point value of 34,308, which is nearly spot on with the current level of the Dow. Using the same math, we can arrive at the following conclusion – for every $1 movement, up or down, in any of the Dow’s 30 constituents, the index will gain +/- ~6.592 points.

Investing in the DJIA

While the DJIA is a closely followed benchmark, it has far fewer options for investors looking to invest in its blend of 30 U.S. stocks. Exchange Traded Funds (ETFs), a blog post for another time, have exploded recently in years. Currently, there is only one ETF that directly tracks the DJIA.

Ticker: DIA is an ETF Trust managed by State Street Global Advisors (SSGA). SSGA hosts many other popular ETFs, with their S&P 500 SPY one of the world’s most popular. I’ve added some cursory information for you when reviewing the DJIA ETF.

Ticker	ETF Name	Price	Expense Ratio	Assets Under Management (AUM)	Inception
DIA	SPDR Dow Jones Industrial Average ETF Trust	$343.03	0.16%	$30.2 billion	1-14-1998

Table 2: Dow Jones ETF Information (As of: 1-16-23)

Closing

The Dow Jones Industrial Average is a popular, highly-followed index with a long lifetime of memories in its rear-view mirror, tracking the United States’ ascent during the 19th and 20th centuries. The DIA ETF provides investors an opportunity to invest in this unique, storied stalwart of Wall Street.

Thank you so much for taking the time to read this post. My wish is that the next time you hear Joe Kernan of CNBC (or anyone, for that matter) say, “The Dow Jones is down 500 points,” you’ll be familiar with the index, the stocks it sports, and the price action that drives that change in point value. In our next series of “U.S. Markets,” we will analyze and discuss my favorite index (yes – you can have a favorite) – The S&P 500.

Acronyms

Acronym	Meaning
AUM	Assets Under Management
CPI	Consumer Price Index
DJA	Dow Jones Average
DJIA	Dow Jones Industrial Average
ETF	Exchange Traded Fund
KISS	Keep it Simple Stupid
IT	Information Technology
S&P	Standard and Poor’s
SSGA	State Street Global Advisors

Table 3: Acronyms

History