The Dow Jones Industrials (DJINDICES: ^DJI ) include 30 of the best companies in the U.S. stock market. But despite the Dow's popularity, the average can't meet every single need that investors have. What's missing from the Dow, and what do you need to do to fill the gaps that investing solely in the Dow would leave in your portfolio?
In the following video, Dan Caplinger, The Motley Fool's director of investment planning, looks at three key investments that you won't find in the Dow. Dan points out that because the Dow focuses on industry leaders, it leaves out small- and mid-cap stocks that have tended to have even better historical performance over long periods of time. Moreover, even though most of the stocks in the Dow are multinational corporations with extensive business presence overseas, the Dow only includes U.S. stocks, leaving out some foreign companies that actually lead their sectors.
As Dan also discusses, the Dow tends not to choose stocks that don't fit its methodology well. He focuses on the examples of PepsiCo (NYSE: PEP ) , Apple (NASDAQ: AAPL ) , and Google (NASDAQ: GOOG ) as stocks that aren't and probably won't be in the Dow. In PepsiCo's case, its No. 2 position in the beverage market makes it an unlikely addition, even though PepsiCo has an extensive snack business that distinguishes it from its biggest rival. For Apple and Google, meanwhile, high share prices make it impractical for the Dow to include their stocks without making a landmark change to its price-weighted methodology. Unless Apple and Google take steps to reduce their share prices through stock splits or spinoffs of businesses, they're likely never to join the Dow. Dan concludes the video with some guidance on what Dow investors can do to ensure you have full exposure to the stock market.
Does Apple deserve to be in the Dow?
One of the most controversial questions about the Dow is whether Apple deserves a spot in the average. It has a huge market cap, but Apple also faces some big challenges in moving forward that could threaten its long-term leadership role. If you want an edge over other investors considering the iDevice giant, be sure to check out "5 Secrets to Apple's Future" from The Motley Fool. This 100% free guide includes actionable advice that you can put to use right now! Just click here now for instant access!