Does the Dow Own Too Many Industrial Stocks?

The name of the Dow Jones Industrial Average (DJINDICES: ^DJI  ) clearly indicates its roots in representing the industrial sector. Yet over the years, the Dow has evolved to include stocks from just about every sector of the economy, ranging from health-care and energy stocks to financials and consumer-oriented stocks. That breadth is what makes the Dow relevant for stock market investors of all sorts.

Yet even with its diversification, the Dow still gets more than 20% of its value from industrial stocks, making the sector the most heavily weighted one in the Dow. Is that industrial focus damaging to the Dow's returns? Let's take a closer look.

The industrials of the Dow Industrials
Many of the key stocks in the Dow are squarely focused on the industrial business. Consider the following stocks:

  • Boeing (NYSE: BA  ) has risen to prominence as one of the two premier aerospace manufacturers in the world, catering both to military and commercial needs. The company has identified an opportunity to bring in trillions of dollars in revenue over the next 20 years in order to meet rising demand for more fuel-efficient aircraft, as airlines have improved their profitability and are finally in a position to make more capital expenditures.
  • United Technologies (NYSE: UTX  ) assists Boeing and others by supplying key parts and components for aerospace manufacturing. It also has other industrial businesses, including its Otis elevator segment and various control systems that have a wide range of industrial applications.
  • Caterpillar (NYSE: CAT  ) is a leader in supplying heavy equipment for construction, infrastructure development, and mining.

In addition to these stocks, several conglomerates also fall into the industrial realm at least in part. 3M (NYSE: MMM  ) is best-known for its consumer-facing office-products lines, but it also has a variety of different businesses that include medical equipment as well as security and protection services for commercial and home safety. And although General Electric's weighting in the Dow is relatively insignificant, the conglomerate still plays a vital role in the U.S. economy and has served as a good barometer of domestic economic activity.

Too much of a good thing?
Put all these stocks together, and more than $1 of every $5 invested in the Dow goes to these industrial giants. That hasn't been a bad thing in 2013, as year-to-date returns among these stocks have generally outpaced the rest of the average, with the exception of Caterpillar. Boeing has managed to bounce back from its Dreamliner disaster as its long-term prospects look incredibly promising. The Goodrich acquisition has helped bolster United Tech's growth and could continue to produce big gains well into the future. And even though Caterpillar faces some challenges, the inevitable turning of the commodity cycle should leave the company better able to compete. Still, with industrial stocks making up less than 9% of the S&P 500, the Dow can experience discrepancies in performance when industrials are outlying returns in either direction.

There's nothing inherently wrong with the Dow's having a greater than 20% concentration to industrial stocks. But investors need to be aware of that concentration if they want to plan accordingly for the risks the concentration creates. Otherwise, Dow investors could get a nasty surprise if the bottom falls out of the industrial manufacturing sector in the future.

No matter what sector you're looking at, the best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.


Read/Post Comments (3) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 20, 2013, at 11:22 AM, luckyagain wrote:

    Making things is at the heart of any economy. Everything else depends upon companies that actually make things. So the health of the industrials underlies all other activities. Just look at China and see how much their economy has improved because they have had such a huge surge in their industrial base.

  • Report this Comment On July 20, 2013, at 2:52 PM, dannystrong wrote:

    DJIA is important because of one man - Walter Cronkite. As part of each and every "that's the way it is" broadcast, he gave out the DJIA number and the number of "millyun" shares traded. Ever since, its the barometer. (Cronkite included it because it changed every day and could be inserted anywhere in the broadcast to get the timings right for commercials.)

  • Report this Comment On July 21, 2013, at 6:40 AM, funfundvierzig wrote:

    It is long past time that the shrinking, sinking DuPont Company (DD) be eliminated from the venerable Dow-30. DD hit a peak of 83 and change over 15 years ago, and its decline and flat-line ever since has been a big drag on the Index. This Delaware-based chemical, materials and second-rate seed conglomerate has not reflected the robust and growing American economy for years. ...funfun..

Add your comment.

DocumentId: 2547211, ~/Articles/ArticleHandler.aspx, 4/20/2014 10:33:25 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement