The announced changes improve the sector representation of the index, said David Blitzer, chairman of the Index Committee at S&P Dow Jones Indices. The changes were not about trying to pick the best stocks, he added. [Indexology: The Dow — 3 for 3]
Although the Dow’s price weighting is a relic from the index’s rich past, it tracks a fairly diverse set of top-quality companies that approximates the industry composition of the U.S. stock market, said Morningstar’s Bryan.
DIA, the Dow ETF, offers investors a convenient way to replicate its performance and may be a suitable core holding, he notes.
“The fund only invests in mega-cap stocks and, therefore, does not represent a large segment of the U.S. market. However, most of these companies have sustainable competitive advantages that may help protect their profitability in bad times. In fact, more than two thirds of DIA’s assets are invested in companies with wide moats, Morningstar’s assessment of a firm’s competitive advantage,” Bryan wrote. “The corresponding figure for the S&P 500 is around 43%. As a result, DIA exhibited less volatility than the S&P 500 over the past 10 years, despite its more concentrated portfolio.”