IBM and Facebook are the Main Reasons the S&P 500 is Beating the Dow This Year

Markets are heading higher today, but only one of America's two most-watched indexes is pushing toward uncharted territory. The Dow Jones Industrial Average (DJINDICES: ^DJI  )  at lunchtime remained more than 100 points below the all-time high close of 16,715 points it reached on May 13, but the S&P 500 (SNPINDEX: ^GSPC  )  was closing in on 1,900 points for the first time ever.

^GSPC Chart

^GSPC data by YCharts.

The S&P has gained 5% more than the Dow over the past decade. Much of that outperformance came in the past year, when the broader index surged nearly 15% compared to a more modest 8.5% gain in its blue-chip counterpart.

^GSPC Chart

^GSPC data by YCharts.

This outperformance vanishes on earlier timelines, as the Dow actually held up better than the more-diverse S&P 500 in the aftermath of the dot-com bubble.

^GSPC Chart

^GSPC data by YCharts.

There's an easy explanation for this discrepancy, as the fortunes of both indices have depended in different degrees on the fortunes of the tech industry. The S&P currently boasts 70 "technology" companies, according to Finviz, while six of the Dow's 30 components are in the tech sector. The Dow should weight its tech companies more heavily, but that's not the case, as its price-weighting scheme penalizes the lower-priced shares of most of its tech components, resulting in a rather weak 13.9% weighting.

The S&P's 70 tech companies, on the other hand, are weighted by the size of their market cap, and that gives them a larger share of the pie, with a total weighting of 17.5%. Finviz actually underrepresents the tech industry in its categorization, since Apple (NASDAQ: AAPL  ) is counted as a consumer goods company despite clearly being part of the Silicon Valley elite. Adding four of the larger tech companies miscategorized in Finviz boosts the industry's weight on the S&P to 22%, which is nearly twice that sector's weighting on the Dow. While only one tech component -- IBM (NYSE: IBM  ) -- is among the Dow's five most heavily weighted, the S&P has eight tech companies ranked among its 20 largest, and those eight components alone account for 12.25% of the S&P's total weight.

AAPL Chart

AAPL data by YCharts.

Apple was the S&P's heavy-hitter until its peak in 2012, but Facebook (NASDAQ: FB  ) has taken the lead as index superstar over the past year. Its current weighting of roughly 0.9% means that its 143% rise during that period has been worth over 1% in gains for the S&P, more than offsetting the weakness in IBM shares. IBM accounts for roughly 1.1% of the S&P's daily movements, but over 7% of the Dow's. Since IBM is the only one of the S&P's biggest tech components to underperform the index itself over the past year, it's easy to see why the Dow has underperformed relative to its more diverse counterpart. Relying too heavily on a few high-priced megacaps has left it vulnerable to a single company's weaknesses in ways the S&P is not.

If the Dow dawdles while the S&P cracks 1,900 points and keeps pushing higher, it may very well be because one index tracks a broader range of large-cap outperformers in a hot sector, while the other relies on the few weak spots in that sector for much of its momentum.

R.I.P. Internet -- 1969-2014

At only 45 years old... the Internet will be laid to rest in 2014. And Silicon Valley is thrilled. Because they know... The Economist believes the death of the Internet "will be transformative." In fact, the CEO of Cisco Systems -- one of the largest tech companies on the planet -- says somebody's going to bank "14.4 trillion in profit from one concept alone."

Click here for a FREE video that gives you what you need to capitalize on the little-known company behind this concept.


Read/Post Comments (0) | Recommend This Article (1)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2970042, ~/Articles/ArticleHandler.aspx, 9/2/2014 10:47:20 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...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement