The two most common indexes watched and the two most common exchange traded funds (ETFs) traded are the ones that track the Dow Jones Industrial Average and the S&P 500. What do you really know about them, though?
Both indexes generally move in tandem, with both either showing gains or losses. However, the magnitude of these moves can differ substantially because of the composition and holdings of the indexes.
The Dow is price-weighted and only holds the top 30 U.S. companies, whereas the S&P 500 is market-cap weighted and holds 500 U.S. companies. As a result of this underlying characteristic, one of the two benchmarks will outperform the other depending on the time period, states Prestbo of MarketWatch.
History further supports this. Over the last decade, the Dow has beaten the S&P 500 in seven times by an average of 4.5%. If one picked a different 10-year span, the results could differ significantly. When considering the most recent market collapse, the Dow fell from its peak a lot quicker than the S&P 500 did, the Dow lost 4.7% in the fourth quarter and the S&P 500 dropped 3.8%.
The reason for this aforementioned inequality is that the S&P 500 holds smaller than mega-cap stocks, unlike the Dow. What’s alarming is that the bottom layer of market capitalization, which is about 20% of the S&P 500, accounted for 35% of the S&P 500’s loss.