One of the oldest indices, and certainly the most frequently quoted and referenced index, for the US stock markets is the Dow Jones Industrial Average (DJIA). Although it is widely used, the reality is that it’s not the most useful index because it only counts 30 stocks at any given point. While these stocks are supposed to reflect the overall stock market as a whole, the reality is that shifts in consumer behavior, technological innovation, and sweeping trends within the underlying economy mean that the Dow Jones Industrial Average is forever playing a game of a catch-up.
As an example, Apple recently announced a 4-for-1 stock split. A single stock of Apple is such a huge part of the index – 12%. After the 4-for-1 stock split, it’s now 3%. That massively changes the underlying amount of technology representation in the DJIA.
The managers of the index frequently have to swap stocks in and out of the index to make it broadly reflective of the market as a whole. Today, the Dow Jones Industrial Average is swapping 3 stocks out of the index: Exxon Mobil, Pfizer, and Raytheon. The 3 replacement stocks are Salesforce, Amgen, and Honeywell. Moreover, the Dow managers adjusted the underlying calculus of the index to make it slightly less sensitive to dollar movements in the 30 underlying stocks.
Does this mean anything for investors? Not really. Candidly, most investors shouldn’t use the Dow Jones Industrial Average as a benchmark for their investments or their overall strategy. The DJIA is one of the first benchmarks because it was simple to calculate before modern technology. Modern indices for the overall stock market with hundreds of holdings (like the S&P 500, or Russell 1000) are more comprehensive.