The Dow Needs More Gold and Financial Stocks

The Dow Jones Industrials (DJINDICES: ^DJI  ) purports to provide a representative view of the U.S. stock market. Apart from its avoidance of transportation and utility stocks, given the fact that other Dow averages focus exclusively on those areas, the Dow chooses its 30 components in a way that tries to include companies from every major sector of the market.

Yet given the limitations of having only 30 stocks and the peculiarities of its price-weighted methodology, the Dow isn't able to give every sector of the market the representation it deserves. Let's look at two areas in which the Dow is particularly egregious in short-changing investors: gold and financial stocks.

The not-so-golden Dow
The Dow doesn't include very many basic-materials stocks of any type, and it has no direct gold exposure at all. DuPont technically counts as a basic-materials company, but its traditional emphasis on chemicals and its evolution toward greater exposure toward agricultural products keeps it well clear of the gold arena. The only metals producer in the Dow is Alcoa, and given aluminum's woes and the rock-bottom share price that Alcoa has, its influence in the Dow is minimal.

The main problem with gold stocks is that none of them as large as most typical Dow components. But arguably the best candidate is Freeport-McMoRan Copper & Gold (NYSE: FCX  ) , which as its name suggests brings the combination of gold and copper production to the table. Its recent acquisitions of two energy-related companies make it a more diversified natural-resources company, but with just two energy stocks, the Dow could benefit from a different angle on oil and gas as well. With Freeport commanding twice the market cap of Newmont Mining and almost double Alcoa's market cap, Freeport is the more logical choice to replace Alcoa and give the Dow a more golden future.

Too few financials?
At first glance, the Dow doesn't seem to be struggling for financial exposure, with two big banks, a combination bank and credit card company, and an insurance giant. But even with those companies within the Dow, the sector carries less than half the weight of the S&P.

Here, the big problem is that share prices aren't reflective of market cap. The most egregious example is Bank of America (NYSE: BAC  ) , whose market cap is double that of American Express yet carries only a fifth of AmEx's weight in the Dow because of its low price. Substituting in Wells Fargo (NYSE: WFC  ) or even former Dow component Citigroup would potentially address much of the problem, as their shares trade at least somewhat more in line with the other Dow financials. Barring that, a reverse share split for B of A would boost the Dow's exposure to financials quite nicely as well.

Looking for balance
The Dow doesn't have to match up with the S&P 500's sector exposure perfectly, as otherwise, there'd be no need to have both indexes. But with a big underweighting of financials and no gold exposure, the Dow misses out on some trends that the broader market offers to those investors willing to take advantage of them. By being aware of the Dow's gaps, you can consider whether you want to add your own individual stock exposure to fill out your portfolio.

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  • Report this Comment On August 04, 2013, at 8:40 PM, duuude1 wrote:

    The Dow unfortunately is missing all of the grand and ancient traditions in money, clothing, weapons, and technology. There is absolutely NO representation of the oldest form of currency, gold, the most ancient form of clothing, the leather loincloth and the hairy birthday suit, and the most revered weapon unchanged for hundreds of thousands of years, the flint hand-axe. Furthermore, why don't we see the world's oldest profession, prostitution of women and young boys, represented in the Dow? And although medical technologies are well represented in the Dow by J&J, Merck, and Pfizer, why are there NO companies peddling leeches, which have been used for thousands of years until this very day? Although Caterpillar is in the Dow, where are the contractors that built the pyramids?

    Adam Smith, writing in "The Wealth of Nations" in 1776 noted that:

    "Gold and silver, however, like every other commodity, vary in their value; are sometimes cheaper and sometimes dearer, sometimes of easier and sometimes of more difficult purchase..... The discovery of the abundant mines of America, reduced, in the sixteenth century, the value of gold and silver in Europe to about a third of what it had been before."

    What a dummy - who the hell is this Adam Smith duuude! Reduced to a third of what it had been before...

    Gold should be valued insanely so the total value of the world's gold should exceed the total market cap of all 30 dow companies. As of 8/2/13, according to Yahoo, when I sum the market caps of all dow companies I get $4.6 Trillion.

    Sheeet, duuuude, using Warren Buffet's 170,000 metric tons of gold in the world, times 35274 ounces per metric ton, times $1400/oz, I get $8.4 trillion. Of course all the world's gold should be worth almost DOUBLE the 30 largest companies in America!! That's as it should be.

    Of course, if gold goes to it's historic inflation-adjusted value of $300/oz, then all the world's gold using the above numbers comes to about $1.8 trillion - or almost 10 times the value of AT&T.

    Slight change of topic: check out this video:

    https://www.youtube.com/watch?v=S_d-gs0WoUw

    See that swarm of spots? Those are all the discovered asteroids and their positions. Guess what - they are LOADED with gold and other precious metals and hydrocarbons and water.... And see how many are close to the earth?

    Oh wait, gold bugs don't know where in that video the earth is? No, it is not the bright spot in the center - that is the sun. Actually the earth is the 3rd circle from the sun in the center. :)

    Duuude1

    Goooold? Really???

  • Report this Comment On August 05, 2013, at 8:35 AM, funfundvierzig wrote:

    The much shrunken and shrinking DuPont Company currently on the eve of a likely major break-up has long ceased representing the growing American economy. The diminished DuPont with its falling sales and earnings should be kicked out of the venerable Dow-30 in favour of a more vibrant and robustly growing American enterprise.

    ...funfun..

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