The Dow Jones Industrial Average: A Brief History and Overview

On Tuesday, November 24, 2020, amid news that a formal transition to the Biden administration is commencing, the Dow Jones Industrial Average (DJIA) surpassed 30,000 points for the first time in history. Since that date, the DJIA has remained steadily above 30,000. This was a significant milestone for the index, which dates back to the late 19thcentury. In other words, it has endured through World War I, the Spanish Flu pandemic, the Great Depression, World War II, the dot-com bubble, the 2008 financial crisis, and now the coronavirus pandemic.

To better understand the Dow Jones Industrial Average, an overview will be provided of its origins, current and past composition, how it compares with other popular stock indexes, and its key characteristics.

History of the Dow Jones Industrial Average

Charles Dow, the first editor of The Wall Street Journal, was responsible for co-founding the Dow Jones Industrial Average (DJIA). More commonly referred to simply as the Dow, the idea was to produce a stock average for readers of the financial section. Charles Dow started by tracking 12 industrial stocks and published the average daily starting in 1896. The number of stocks tracked increased in 20 in 1916, and then to the present-day number of 30 stocks starting in 1928.

In the late 1990s, the index shifted toward tech stocks, adding industry giants at the time such as Microsoft, Intel, and Hewlett-Packard. The removal of previous blue-chip stalwarts Eastman Kodak, International Paper, and AT&T shook up the index in 2004.

Today, the composition of index has shifted even further away from incumbent companies. In 2020, Salesforce.com, Amgen, and Honeywell joined the index. To make room for these new entrants, the Dow removed Exxon Mobil, Pfizer, and Raytheon Technologies. Raytheon and Exxon both had a presence on the Dow since before World War II. Exxon Mobil had been on the index since 1928, going by its former name Standard Oil (N.J.) for many years. Raytheon, previously known as United Technologies, occupied a spot on the index since the 1930s. The removal of Exxon Mobil and the addition of Salesforce.com in its place was symbolic of the dwindling momentum surrounding the energy sector and the rising clout of software platforms.

Membership

The Dow is a stock market index consisting of the 30 largest companies listed on stock exchanges in the United States. Investors regard it as one of the most widely followed equity indexes in the United States. A committee of representatives from the S&P 500 and Dow Jones Indices and the Wall Street Journal have the final say on membership. The committee evaluates companies based on their capacity for sustained growth and industry reputation.

Current members of the DJIA include Apple, Disney, Microsoft, and Goldman Sachs. Coca-Cola and General Electric are two examples of member companies that have dropped out and reappeared back on the index years later. Today, six of the 30 companies on the Dow can trace their beginnings on the index to before 1940.

Dow Jones Comparison with Other Benchmarks

The Standard & Poor’s 500 index, more commonly referred to as the S&P 500, is a stock market index that tracks the performance of the 500 largest publicly-traded U.S. companies. It was introduced by Standard & Poor’s in 1957, a number of years after the DJIA.

Unlike the S&P 500, which weighs by market value, the Dow is weighed by share price. As a price-weighted index, the Dow is more affected by extreme price movements than the S&P 500. The “Dow Divisor” is used to calculate the level of the DJIA. The numerical formulation helps to smooth out the effects of stock splits and dividends.

The S&P 500 is a much broader index of large-cap U.S. stocks than the Dow Jones. As a benchmark for the 500 largest U.S stocks, investment managers widely regard it as one of the most important stock market indexes. Similar to the DJIA, the S&P 500 ended 2020 at record highs. Tesla, with its seemingly unstoppable stock price increases, made the S&P 500 at the end of 2020.

A third prominent equity benchmark, the Nasdaq Composite, is a stock market index that includes nearly all the stocks listed on the Nasdaq stock exchange. The Nasdaq stock exchange includes many technology companies and other high-growth industries. The Nasdaq Composite likewise ended 2020 at record highs, showcasing its best annual return in 11 years with a 43.6% gain.

ETF Investing

Investors are able to invest in these indices by buying shares in an exchange traded fund (ETF) that closely tracks its performance. An ETF is an investment fund that trades on a stock exchange. It trades similarly to an individual stock, except that an ETF is composed of a collection of many different companies’ shares.

To closely track the investment results of the Dow, investors can purchase shares in an ETF called the SPDR Dow Jones Industrial Average ETF. Launched in 1998, this ETF invests in the stock of all the companies listed on the Dow. Another index that closely tracks the Dow’s performance is called iShares Dow Jones US ETF. This ETF invests at least 90% of its assets in shares of the underlying index.