Dow Jones Industrial Average index is formed based on the price of 30 selected US listed stocks. The Dow Jones Index was created in the early 1900 by Charles Dow. At the time conservative investors focused on bonds and stocks were known to be speculative investment for investors much equivalent to how investors sees penny stocks today.
Throughout the 1900’s and into the 2000 as investment funds shifted towards stock markets. The Dow Jones Index has become the fabric of the investment landscape where the first instance investors want to know “what happened to the market today” they look towards the Dow Jones Index.
The original index was created with less than 15 stocks and overtime the index curators expanded the list of Dow stocks to 30 in 1928. While the components of the Dow Jones Index has changed over time, the total number of stocks in the DJIA today remains the same.
Although 30 stocks can be considered relatively concentrated for a portfolio. Investors can see below that the Dow Jones Industrial Average stocks spreads across a number of industry sectors so the overall index is not overly dependent on specific stock or sector performance.
Dow Jones Components Today
The combined market capitalization of the list of dow stocks account for almost half a trillion dollars. This is pretty amazing as 30 stocks are included in the Dow Jones Industrial average stock list. The table below shows the Dow Jones Index components by Stock and its Industry, percentage of index and market capitalization.
Note: Market Cap in Billions and can differ to weight in the index
The above list of Dow Stocks shows the index is broadly diversified even though it is commonly known as the Industrial Index. One note is that the index does not include Transport and Utilities which have their own Dow Jones indexes. These two also have a special place with investors as they form the famous Dow Theory which some investors think can signal market tops.
Chart below highlight the top 5 largest sectors Oil & Gas (14%), Pharmaceuticals (13%), Conglomerate (10%), Software (7%) and Retail (5%). The remaining sectors account for 51% of the Index.
Dow Jones Components by Sector
Dow Jones Index Fund (DJIA ETF)
Investors can use Index Funds or Exchange Traded Funds to track the performance of the Dow Jones Index. Investors using DJIA ETF see it as a cheap option for investors compared to actively managed funds.
Proshares Short Dow 30 (DOG) is an inverse market ETF.
DOG look to return performance opposite of the Dow Jones Industrial average stocks
DXD and UDOW target to track 2 times and 3 times inverse return of the index.
Expense ratio of inverse DJIA ETF is 4 times the traditional index tracking funds
Dow Jones Index History
DJIA today for what it is, a major market index is because of the strong historical relationship to overall equity market development. Historical performance shows that it tracks closely with the S&P 500. Chart below shows the 5 year performance of the Dow Jones Industrial Average.
Dow Jones Index History
NASDAQ not surprisingly has outperformed both ETFs tracking DJIA and S&P 500. However with any investment. Higher returns means higher risk. A more comparable benchmark is the S&P 500.
Over the last 10 years it has outperformed the index by 5%. The average annual return of the index since late 1990’s is around 7% so a 5% outperformance equals almost an additional year of returns.