The Dow Jones Industrial Index recently celebrated its 120-year birthday. To mark the occasion, The Atlantics Bourree Lam examined everything the Dow represents to investors and everything it does not.
The Dow was first created back in 1896 and was originally comprised of only 12 companies. Membership has changed a lot over the years, and General Electric Company (NYSE:GE) is now the lone remaining member of the inaugural class.
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Early members of the Dow were all industrial leaders, but the composition of the index has morphed over time along with the U.S. economy itself.
The 30 current members of the Dow represent more than $5 trillion in combined market cap. Incredibly, those 30 companies make up roughly 20 percent of the entire U.S. stock market. In that sense, these companies tell an important story when it comes to the U.S. economy.
However, as Lam points out, people shouldnt confuse the Dow with the entire U.S. economy or the entire U.S. stock market.
It only tracks the winners, not the losers, Lam explains. The companies in the index are chosen by the editors at The Wall Street Journal, and companies are removed as they become less relevant.
In that sense, the Dow, which is up more than 486 percent in the past 25 years, tends to paint an overly-rosy picture of the U.S. economy and the stock market.
These days, indices like the S&P 500 or the Russell 2000 might be better gauges of the U.S. economy, but the popularity of the Dow Jones among investors, the history associated with the index and the economic influence of its 30 members likely mean that the Dow isnt going away anytime soon.
In the past 15 years, the SPDR Dow Jones Industrial Average ETF (NYSE:DIA) is up 60.4 percent. In that same time, the SPDR S&P 500 ETF Trust (NYSE:SPY) is up 64.8 percent and the iShares Russell 200 Index (ETF) (NYSE:IWM) is up 128.2 percent.
Disclosure: the author holds no position in the stocks mentioned.
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