The Dow Jones Industrials
But even though the Dow does a good job of being a fairly representative sample of the U.S. stock market, there are a few areas where it does an inadequate job covering the field. Let's identify some of those missing areas and then search for some companies that might fill the void.
First and foremost, it's important to note that the Dow was designed to exclude two important sectors of the market: transportation stocks and utilities. These two categories have Dow averages of their own, so putting them into the Dow Industrials would introduce redundancies that would transform the relationship among the three averages.
Still, there's one area that has historically blurred the line: vehicle production. Until shortly before its collapse during the financial crisis, General Motors had a long-held place among the Dow 30. Given GM's still-substantial ownership by the U.S. and Canadian governments, it's unlikely to rejoin the Dow anytime soon. But Ford
The growth in health care
The Dow also has some sectors where there's plenty of representation, but the companies selected don't cover the entire universe of subsectors within that sector. One example is health care, where you have fairly broad coverage of pharmaceuticals, medical devices, and consumer health products.
But the missing piece of the puzzle is biotech. Increasingly, biotech stocks have been the growth drivers in the health-care industry, as older pharmaceutical companies struggle to build up pipelines of traditional drugs that can replace aging blockbusters that have gone or are slated to go off-patent. In many cases, Big Pharma has simply bought pipelines from promising small biotechs, while others have formed partnerships with some of the larger companies.
Among biotechs, Amgen
Recognizing the Internet
The Dow has always been a bit slow to adopt new technology. Although IBM has been in the average for decades, most of the current tech members of the Dow are relatively recent entrants to the benchmark. And while many of them have tied their fortunes to the Internet over time, what you won't find are stocks whose success came from the Internet.
Several different subclasses of Internet stocks present promising candidates. Amazon.com has become a leading retailer not just compared with online peers but with the retail industry in general, and its ongoing innovation in hardware, virtual computing, and other technological advancements have helped give it its $100 billion market cap. Meanwhile, eBay
One could even make a case for having Facebook
What the Dow offers now
Even though the Dow leaves out some promising stocks, what it does include still gives you plenty of good investing prospects. Be sure to read The Motley Fool's brand-new special report, "The 3 Dow Stocks Dividend Investors Need," and learn how some of the Dow's healthiest dividend-rich growth prospects give you the best of all worlds. Grab your free copy today.
Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. You can follow him on Twitter, @DanCaplinger. The Motley Fool owns shares of IBM, Ford, Amazon.com, and Facebook. Motley Fool newsletter services have recommended buying shares of Amazon.com, eBay, Ford, and General Motors, as well as creating synthetic long positions on IBM and Ford. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.