With two major stock indices rising to uncharted territory, a lot of the market’s attention has been focused on the Dow Jones Industrial Average and the S&P 500, along with related exchange traded funds. We all know the indices by name, but what exactly are they?
The major difference between the two indices is found in the way they are constructed. The Dow includes a price-weighted average of 30 stocks while the S&P 500 is a market capitalization-weighted index of 500 large companies. In truth, most market professionals tend to favor the S&P 500 as a more realistic gauge of U.S. stocks.
The Dow is comprised of the 30 largest companies in the U.S. across a number of sectors. Holdings are selected by the editors of the Wall Street Journal. Since the index is price-weighted, components with higher prices will have a larger impact on the daily movements in the Dow. This somewhat arbitrary weighting method is often criticized. Daily changes in the Dow are calculated by adding prices of the 30 Dow stocks and then divided by the “Dow Divisor.”
Currently, International Business Machines (NYSE: IBM), which is trading at about $209, is the largest component holding at 11.1% and General Electric Co. (NYSE: GM), which is trading around $28, is the smallest holding at 1.3%. [What’s Next After Dow ETF Record?]
On a sector basis, the Dow also leans toward industrials 20.9%, followed by technology 16.2%, consumer discretionary 12.0%, energy 11.2% and financial services 11.2%.
Investors interested in gaining exposure to the Dow can take a look at the SPDR Dow Jones Industrial Average ETF (NYSEArca: DIA). [ETF Chart of the Day: Dow Jones Industrial Average]
The S&P 500, on the other hand, is overseen by an S&P board and is a market capitalization-weighted index – weightings are determined by taking the price of a stock times the number of shares outstanding. Consequently, larger companies have a greater influence over the index. Nevertheless, individual holdings are pretty evenly spread out, with Exxon Mobil (NYSE: XOM) as the largest holding at 3.1%.
Technology is the index’s largest sector at 16.5%, followed by financial services 14.7%, healthcare 12.2 and industrials 11.0%.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own SPY.