The Dow Jones Industrial Average celebrated its 125th birthday last week. Some things pass the test of time, but this outdated index is not one of them.
Trillions of dollars are indexed to the S&P 500, but money managers ignore the Dow. This 30-stock index isn't representative of present-day corporate America – there's no Amazon, no Google, no Facebook, no Berkshire Hathaway.
There were no computers 125 years ago, so it was easier to weight companies by share price rather than market capitalisation. A price-weighted index means United Health Group's high share price results in it accounting for almost 8 per cent of the index – over three times as much as Apple, even though Apple's market capitalisation is over five times higher.
Insurance company Travelers also has a greater weighting than Apple, even though the iPhone maker’s $2.1 trillion valuation is more than 50 times greater than Travelers’ ($40 billion).
Goldman Sachs's impact is seven times greater than Intel's, even though Intel is almost twice as valuable.
It’s daft. Nevertheless, when retail investors think of the stock market, they think of the Dow, so the media continues to report on it.
In 2017 Wall Street Journal columnist James Mackintosh argued that while the Dow’s brand is too strong to kill off, it could be applied to a broader index like the 3,885-stock Dow Jones US Total Stock Market Index. It’s a good idea. In its current state, the Dow is an index that is well past its sell-by date.
