The Dow Jones Industrial Average is a widely followed stock index that tracks 30 large US companies. Created in 1896, it’s one of the world’s oldest indexes.
Yet despite what its name might suggest, it tracks more than just industrial companies. In fact, it includes stocks from most sectors outside of utilities and transportation, which are measured separately by specific indexes.
So, this would provide my portfolio with very broad exposure to the US economy, thereby offering useful diversification.
But should I invest in it? Let’s take a look.
Which stocks are in the Dow Jones?
The Dow rarely reshuffles the pack, but in 2020 it axed ExxonMobil, Pfizer, and defence giant Raytheon. It replaced them with Salesforce, Amgen, and Honeywell.
Today, some of its well-known constituents include Apple, Boeing, Disney, Goldman Sachs and Walmart. Procter & Gamble was added to the Dow in 1932 and has been there ever since.
Some market commentators have been speculating that tech titans Amazon or Alphabet could be the next Dow stocks. However, that’s hard to predict because there’s no set methodology that automatically guarantees inclusion.
How could I invest in it?
As the Dow only comprises 30 companies, I could realistically buy all of those stocks (at least over time) to replicate its performance. However, that would be expensive, as I would likely incur trading costs and foreign exchange fees buying these dollar-denominated stocks.
So, the easiest way to invest would be for me to buy shares in a Dow-focused exchange-traded fund (ETF). There low-cost products aim to simply mimic the index’s performance.
Speaking of performance, the Dow’s has been exceptional. A $10,000 investment in the index 10 years ago would now be worth around $28,000 (with dividends reinvested).
That easily beats the performance of the FTSE 100 over the same time frame, though the Footsie’s dividend yield of 3.7% is nearly double that of the Dow (1.95%).
Will I buy the index?
Most stock market indexes are weighted by market capitalisation. However, the Dow Jones is price-weighted, which means that the components with the highest share prices — not the largest market caps — have more influence.
So, for example, the Goldman Sachs share price (at $319 today) has more impact on the Dow than that of Apple’s at $187. That’s despite the iPhone-maker’s market value being more than 20 times the size of Goldman Sachs today.
Indeed, Apple was only added to the index in 2015 after a 7-for-1 stock split. At the time, it already had a market cap in excess of $700bn!
This price-weighted system also means that without a considerable stock split of its A-class shares (priced at over $500,000 today), Berkshire Hathaway will never enter the Dow Jones.
To me, that seems baffling and, at best, makes the system look antiquated.
That said, the index is made up of blue-chip businesses that produce healthy cash flows and possess defensive qualities. That may provide limited downside in a bear market. Plus, valuations are much more modest compared to the tech-heavy Nasdaq.
On balance though, I think I’d rather continue to pick individual stocks than invest in the Dow Jones. Yes, that’s arguably more risky, but at least I keep control over which companies I choose to invest in.
