The historic Dow Jones Industrial Average (^DJI +0.02%) has undergone major changes in recent years. In 2020, Salesforce (CRM 2.43%), Amgen, and Honeywell International replaced ExxonMobil, Pfizer, and Raytheon Technologies (now RTX). In February, Amazon (AMZN +0.55%) replaced Walgreens Boots Alliance. And in November, Nvidia (NVDA +1.73%) and Sherwin-Williams replaced Intel and commodify chemical giant, Dow.
The addition of Salesforce and now Amazon and Nvidia has made the Dow more tech-oriented. It is no longer an index dominated by dividend-paying value stocks. And in many ways, the Dow's changes warrant a new definition for blue chip stocks.
With the Dow up 18.5% year to date compared to 27.7% for the S&P 500 (^GSPC +0.84%) and 28.5% for the Nasdaq-100 (at the time of this writing), some investors may be wondering if the Dow could outperform the other indexes in 2025 now that it will have a full year of Amazon and Nvidia. After all, the Dow has just 30 components compared to 503 for the S&P 500 and 101 for the Nasdaq-100. The Nasdaq-100 includes the largest non-financial companies by market cap in the Nasdaq Composite.
Here's what it would take for the Dow to beat the S&P 500 and the Nasdaq-100 next year, and the surprising reason why an outperformance from Nvidia and Amazon could make the Dow lag the other indexes by even more.
Image source: Getty Images.
Index dynamics and nuances
Despite having fewer components, the Dow has a lower weighting in Nvidia and Amazon than the S&P 500 or the Nasdaq-100, but it has a higher weighting in other top growth stocks like Salesforce. Here's a look at how some growth-focused companies are weighted in the Dow compared to the other indexes.
|
Company |
Dow Jones Industrial Average |
S&P 500 |
Nasdaq-100 |
|---|---|---|---|
|
Microsoft (MSFT 1.33%) |
6.1% |
6.4% |
7.7% |
|
Salesforce |
5% |
0.7% |
N/A |
|
Visa (V 0.77%) |
4.2% |
1% |
N/A |
|
American Express (AXP 0.90%) |
4.1% |
0.3% |
N/A |
|
Apple (AAPL +2.08%) |
3.3% |
7.2% |
8.7% |
|
International Business Machines (IBM +0.00%) |
3.2% |
0.4% |
N/A |
|
Amazon |
3% |
4% |
5.4% |
|
Nvidia |
2% |
6.9% |
8.4% |
|
Walt Disney (DIS 0.68%) |
1.6% |
0.4% |
N/A |
|
Nike (NKE 0.61%) |
1.1% |
0.2% |
N/A |
Data source: Slickcharts.
The Dow is a price-weighted index, whereas the S&P 500, Nasdaq-100, and Nasdaq Composite are market-cap weighted.
This means that if two companies both had a $100 billion market cap, and one company had 100 billion shares at $1 a share and the other had 10 billion shares at $10 a share, the $10 per-share company would be worth ten times more in the Dow. In contrast, they would be equally weighted in the other major indexes. Stock splits affect the Dow due to its price-weighted nature. So although Nvidia is the second-largest company in the world by market cap (behind Apple), it is a below-average weighting in the Dow because of its lower share price.
The table shows that the Nasdaq-100 doesn't include Salesforce, which is a prominent growth stock. The Nasdaq-100 also excludes major credit card companies and balanced companies like IBM, Disney, and Nike. All six of these companies are listed on the New York Stock Exchange (NYSE), so they aren't in the Nasdaq-100. Oracle, which is worth over $530 billion, is another example of a well-known growth stock that isn't in the Nasdaq-100 because it is listed on the NYSE.
Nasdaq-100 dominance
Aside from the ultra-large companies like Apple, Nvidia, Microsoft, and Amazon, Dow components tend to have higher weightings in the Dow than other indexes like the S&P 500 and the Nasdaq-100 because there are only 30 components. Therefore, the path for the Dow to beat the S&P 500 and Nasaq-100 in 2025 is fairly straightforward. It requires the companies with higher weightings in the Dow than in the other indexes to do exceptionally well. But many of them already have been doing well.
For example, the highest weighted Dow component, Goldman Sachs, is up 55.5% year to date at the time of this writing. Caterpillar and Home Depot are also heavyweight Dow stocks, and they are both hovering around all-time highs, up 33.6% and 24.4%, respectively.
Over the last decade-plus, when the market is having a big year, the Nasdaq-100 has handily outperformed the Dow. Whereas when the market is having a big down year, like in 2022, the Dow's value-oriented nature has helped limit the losses.
|
Total Return |
2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
2023 |
2024 (as of Market Close Dec. 6) |
|---|---|---|---|---|---|---|---|---|---|---|---|
|
Nasdaq-100 |
19.4% |
9.8% |
7.3% |
33% |
0% |
39.5% |
48.9% |
27.5% |
(32.4%) |
55.1% |
28.3% |
|
S&P 500 |
13.7% |
1.4% |
12% |
21.8% |
(4.4%) |
31.5% |
18.4% |
28.7% |
(18.1%) |
26.3% |
29% |
|
Dow Jones Industrial Average |
10% |
0.2% |
16.5% |
28.1% |
(3.5%) |
25.3% |
9.7% |
21% |
(6.9%) |
16.2% |
20.9% |
Data source: YCharts.
We'll probably see less separation between the Dow and the other indexes going forward thanks to the addition of Nvidia and Amazon, and because both Microsoft and Salesforce have high weightings in the Dow than in the S&P 500 and Nasdaq-100. But I would still expect the Nasdaq-100 to outperform the S&P 500 and the Dow when there's a megacap growth stock-driven rally.
Using indexes to your advantage
As an individual investor, it doesn't really matter which index is doing the best. What matters is achieving your financial goals. Knowing the composition of the major indexes and what's driving the broader market can help you filter out the noise and process the most relevant information. It can also shed light on some of the flaws in the major indexes, like the Nasdaq-100 leaving out so many top growth stocks or the Dow's wacky structure. Knowing the ins and outs of the indexes is also useful because they are mentioned regularly in financial coverage. It's like a chemist knowing the atomic number of carbon or oxygen off the top of their head without looking it up every time.
Plenty of index funds allow you to mirror the performance of the S&P 500, Nasdaq-100, or even the Dow. However, some investors may want to consider low-cost exchange-traded funds (ETFs) instead. For example, the Vanguard Growth ETF and the Vanguard Value ETF include companies from the Nasdaq and the NYSE and only charge 0.04% expense ratios.
In today's era of low-cost and no-cost trading and fractional shares, building a portfolio (no matter how small) with stocks and ETFs that match your risk tolerance and interests is easy.
In sum, keeping track of the indexes to understand the market is helpful, but they don't necessarily have to impact your portfolio.
