Does the Dow Really Represent the American Economy?

With just 30 components, it can be easy for America's most-watched index to overlook important sectors or to misrepresent their true value to the American economy.

Feb 18, 2014 at 12:08PM

Every investor knows that the Dow Jones Industrial Average (DJINDICES:^DJI) is designed to represent America's economy by showcasing its most prominent public companies across a wide range of industries. As the American economy has changed, the Dow has too -- its current composition bears little resemblance to the heavy-industry lineup that dominated the roster throughout much of the 20th century.

But is the Dow really an accurate representation of American business? At the moment, its 30 components can be broken down into the following sectors:

Sector

Representatives

Financials

  • American Express (NYSE: AXP)
  • Goldman Sachs (NYSE: GS)
  • JPMorgan Chase (NYSE:JPM)
  • Travelers (NYSE: TRV)
  • UnitedHealth (NYSE: UNH)
  • Visa (NYSE: V)

Industrials

  • Boeing (NYSE: BA)
  • Caterpillar (NYSE: CAT)
  • General Electric (NYSE:GE)
  • United Technologies (NYSE: UTX)

Technology / Telecom

  • Cisco (NASDAQ: CSCO)
  • IBM (NYSE: IBM)
  • Intel (NASDAQ: INTC)
  • Microsoft (NASDAQ:MSFT)
  • AT&T (NYSE: T)
  • Verizon (NYSE: VZ)

Energy

  • Chevron (NYSE: CVX)
  • ExxonMobil (NYSE: XOM)

Health Care

  • Johnson & Johnson (NYSE: JNJ)
  • Merck (NYSE: MRK)
  • Pfizer (NYSE: PFE)

Basic Materials

  • DuPont (NYSE: DD)
  • 3M (NYSE: MMM)

Consumer / Retail

  • Disney (NYSE: DIS)
  • Home Depot (NYSE: HD)
  • Coca-Cola (NYSE:KO)
  • McDonald's (NYSE: MCD)
  • Nike (NYSE: NKE)
  • Procter & Gamble (NYSE: PG)
  • Wal-Mart (NYSE: WMT)

Source: Yahoo! Finance.

But this doesn't fully reflect the way these sectors are weighted. The Dow is price-weighted, which means that shares that cost more will have more of an impact on the index's movements. Here's how that looks when we break it down by sector, based on the most recent weighting data available:

Dow Sector Weightings | Create Infographics.

As you can see, the Dow's financial components are well-represented, but it looks like industrial and energy stocks get short shrift. Can banks and insurance companies really be so important to the American economy that they can exert roughly twice the pressure on the Dow's movements as the tech sector, and nearly four times the pressure as the health care sector?

Probably not. According to the Bureau of Economic Analysis, the finance and insurance industries accounted for roughly 6.6% of U.S. GDP in 2012. Things look a bit better if you lump this grouping together with real estate services (as the BEA does), which brings the sector's total contribution up to a whopping 19.5% of GDP. But none of the financial companies on the Dow can rightly be called part of the "real estate" industry, even though JPMorgan could loosely claim affiliation by pointing out its mortgage operations.

How should these sectors be rebalanced? Do they need to be? Or is this just another sign that the Dow is simply no longer really relevant to the modern investor? Let us know what you think by leaving a comment below.

The American economy might get shaken up soon (in a good way)
U.S. News & World Report says this "Will drive the U.S. economy." And Business Insider calls it "The growth force of our time." In a special report entitled "America's $2.89 Trillion Super Weapon Revealed," you'll learn specific steps you can take to capitalize on this massive growth opportunity. But act now, because this is your shot to cash in before the fat cats on Wall Street beat you to the potentially life-changing profits. Click here now for instant access to this free report.

Alex Planes owns shares of Intel. Add him on Google+ or follow him on Twitter @TMFBiggles for more insight into markets, history, and technology.

The Motley Fool recommends 3M, American Express, Chevron, Cisco Systems, Coca-Cola, Goldman Sachs, Home Depot, Intel, Johnson & Johnson, McDonald's, Nike, Procter & Gamble, UnitedHealth Group, Visa, and Walt Disney. The Motley Fool owns shares of Coca-Cola, General Electric Company, Intel, International Business Machines, Johnson & Johnson, JPMorgan Chase, McDonald's, Microsoft, Nike, Visa, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers