There's arguably no stock index more widely followed, or considered to be more iconic, than the Dow Jones Industrial Average (DJINDICES:^DJI). The 30-stock index, comprised primarily of U.S. multinational juggernauts from a variety of sectors, has been around for 121 years and counting, making it the second-oldest index behind only the Dow Jones Transportation Index. Having that much history naturally makes the Dow an index that retail investors and industry pundits watch closely.
But the Dow is far from a perfect index. In fact, it might be just as dated as the rotary phone.
The Dow has a number of critical shortcomings
One of the biggest issues with the Dow is that it's a point-based index rather than a market-cap-weighted index. In simpler terms, the point value of its securities determines the magnitude of its move, allowing a company's share price to bear more importance than its market cap.
With a current Dow divisor of 0.14523396877348, according to The Wall Street Journal, each "point" for a Dow component equates to 6.885 Dow points. This means a company like General Electric (NYSE:GE), with a $216 billion market cap, but only a $24.93 share price, contributes just 171.65 points toward the Dow's total value. Comparatively, Boeing (NYSE:BA) has a market cap of $150 billion, but a share price of $253.70. This means Boeing is responsible for 1,746.83 points toward the Dow's total value, or 7.83% of its points as of the close on Sept. 26, despite a smaller market cap. Relying on share price rather than market cap doesn't make a whole lot of sense.
It can also be rightly argued that the Dow Jones Industrial Average isn't all that representative of the U.S. economy, in general, given its total market cap compared to the S&P 500 (SNPINDEX:^GSPC). Near the end of June, the Dow had a market capitalization of nearly $6.4 trillion, which was less than a third of the S&P 500, which boasted a market cap of $21.8 trillion at the time.
Surprise! This sector isn't included in the Dow Jones Industrial Average
But an oft-overlooked drawback of the Dow is that it actually doesn't even represent all 10 sectors of the economy. As you might expect, the Dow offers a lot of representation to industrial components, like General Electric and Boeing, but it has absolutely no utilities in the index. In fact, it doesn't appear as if a utility stock has been in the Dow since North American Company was removed on Jan. 29, 1930! (It should be noted that North American Company wasn't even a pure utility, with only some of its subsidiaries operating in the public utility industries.)
Though utilities only represent 3.3% of the S&P 500, they nonetheless play an important role by providing basic-needs goods such as electricity, water, or wastewater services to homes and businesses around the country. These basic-needs goods and services are essential, yet they're completely overlooked by the Dow.
Here's a quick way to get your utility fix
Does this mean you shouldn't buy a tracking index for the Dow simply because it excludes the utility sector? Not necessarily, since the Dow still tracks 30 very geographically diversified companies that have demonstrated they have time-tested business models. However, if you want to ensure that you have your feet dipped in every pond possible, you may want to consider picking up an ETF that focuses on utility stocks.
For example, the Utility Select Sector SPDR ETF (NYSEMKT:XLU) has a very low gross expense ratio of just 0.14% per year, and as of Sept. 25, had 28 different holdings with an average yield of 3.2%. That's more than 60% higher than the average yield of the S&P 500. The Utility Select Sector SPDR ETF is particularly weighted toward electric utilities, which make up about 62% of invested funds, with water utilities comprising a much smaller 2% allocation. Nevertheless, multi-utilities make up 33% of this ETF, so that provides some semblance of balance between pure electric utilities and pure water utilities.