Is the DJIA a dinosaur of an index?

Journalists, talking-heads, and even economists and financial planners pay close attention to the daily changes and long-term trends of the Dow Jones Industrial Average, also known as the Dow or DJIA.

But given that the Dow is over 120 years old, is it still relevant? And are some really large – and arguably more reflective of today’s markets – companies missing?

History

The DJIA is a stock market index created in 1896 by Wall Street Journal editor and co-founder of Dow Jones & Company, Charles Dow.

The DJIA tracks the market performance of the same 30 American companies and initially, had only 12 stocks. These included such golden oldies as American Cotton Oil Company, U.S. Leather Company, and Distilling & Cattle Feeding Company. In 1920, the Dow expanded to 20 stocks and then to 30 stocks in 1929.

Due to its age, proponents of the DJIA suggest that it represents a continuous chart of our nation’s economic growth, as it is a blue-chip index, meaning that it is composed only of very-large, publicly traded companies.

Other market observers argue that broader indexes like the S&P 500 or the Wilshire 5000 are a better way to measure the status of the stock market. Because the Dow has only 30 stocks, they argue, it does poorly in showing the total scope of the market.

Members of the Dow

The Dow contains only the giant companies – the heavyweights of the stock market – stocks that are bought and sold every day, all day long. However, the exact composition of the Dow has changed at various times over the last 120+ years, even though most individual stocks stay in the Dow for years. The biggest companies are periodically replaced by even bigger ones.

General Electric was the last of the 12 original companies remaining in the DJIA, but it was removed in the summer of 2018 (it was also removed for 6 months in the 1890s and from 1901-1907, so maybe it can make a comeback?).

Here is the current list of 30 companies in the DJIA:

• 3M
• American Express
• Apple
• Boeing
• Caterpillar
• Chevron
• Cisco
• Coca-Cola
• DowDuPont
• Exxon Mobil
• Goldman Sachs
• Home Depot
• IBM
• Intel
• Johnson & Johnson
• JPMorgan Chase
• McDonald’s
• Merck
• Microsoft
• Nike
• Pfizer
• Procter & Gamble
• Travelers Companies
• United Health
• United Technologies
• Verizon
• Visa
• Walmart
• Walgreens Boots Alliance
• Walt Disney

Are some companies missing?

So, who decides which companies are allowed into the club of 30 companies used for the Dow Jones Industrial Index? Surprisingly, newspaper editors! Dow Jones owns the Wall Street Journal, where Charles Dow was once the editor.

As a result, the editorial board of the Wall Street Journal decides who gets into the Dow 30 and who leaves. These changes do not happen very often, however. And yearly company success in the market is hardly the only factor. Plus, when one company enters the Dow, another has to leave.

But ask yourself this, do you think that some of the companies in the DJIA are reflective of the 21st century markets?

Heck, if we simply go by market cap, the following companies all have market caps significantly bigger than every single DJIA company except for Microsoft and Apple and might warrant inclusion:

• Amazon (market cap of $875b)
• Alphabet (Google’s parent has a market cap of $818b)
• Berkshire Hathaway (market cap of $493b)
• Facebook (market cap of $475b)

Other companies that can enter this conversation might include:

Maybe Bank of America vs. Goldman Sachs?

Maybe Oracle vs. Merck?

Maybe Pepsi vs. Coca-Cola?

Maybe Netflix vs. IBM?

Should the Dow become extinct?

As the economy moved from heavy industry to consumer goods to technology, the Dow’s membership did change to somewhat reflect the market. But the reality is that the Dow should not be the only index used to measure the ups and downs of the U.S. stock markets.

There are a lot of other indices are useful in different ways. And most financial planners follow several different indexes on a daily basis. You should too.