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Does the Dow Really Represent the American Economy?

By Alex Planes – Feb 18, 2014 at 12:08PM

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With just 30 components, it can be easy for America's most-watched index to overlook important sectors or to misrepresent their true value to the American economy.

Every investor knows that the Dow Jones Industrial Average (^DJI -1.03%) is designed to represent America's economy by showcasing its most prominent public companies across a wide range of industries. As the American economy has changed, the Dow has too -- its current composition bears little resemblance to the heavy-industry lineup that dominated the roster throughout much of the 20th century.

But is the Dow really an accurate representation of American business? At the moment, its 30 components can be broken down into the following sectors:

Sector

Representatives

Financials

  • American Express (NYSE: AXP)
  • Goldman Sachs (NYSE: GS)
  • JPMorgan Chase (JPM 0.17%)
  • Travelers (NYSE: TRV)
  • UnitedHealth (NYSE: UNH)
  • Visa (NYSE: V)

Industrials

  • Boeing (NYSE: BA)
  • Caterpillar (NYSE: CAT)
  • General Electric (GE 0.73%)
  • United Technologies (NYSE: UTX)

Technology / Telecom

  • Cisco (NASDAQ: CSCO)
  • IBM (NYSE: IBM)
  • Intel (NASDAQ: INTC)
  • Microsoft (MSFT -2.03%)
  • AT&T (NYSE: T)
  • Verizon (NYSE: VZ)

Energy

  • Chevron (NYSE: CVX)
  • ExxonMobil (NYSE: XOM)

Health Care

  • Johnson & Johnson (NYSE: JNJ)
  • Merck (NYSE: MRK)
  • Pfizer (NYSE: PFE)

Basic Materials

  • DuPont (NYSE: DD)
  • 3M (NYSE: MMM)

Consumer / Retail

  • Disney (NYSE: DIS)
  • Home Depot (NYSE: HD)
  • Coca-Cola (KO -0.05%)
  • McDonald's (NYSE: MCD)
  • Nike (NYSE: NKE)
  • Procter & Gamble (NYSE: PG)
  • Wal-Mart (NYSE: WMT)

Source: Yahoo! Finance.

But this doesn't fully reflect the way these sectors are weighted. The Dow is price-weighted, which means that shares that cost more will have more of an impact on the index's movements. Here's how that looks when we break it down by sector, based on the most recent weighting data available:

Dow Sector Weightings | Create Infographics.

As you can see, the Dow's financial components are well-represented, but it looks like industrial and energy stocks get short shrift. Can banks and insurance companies really be so important to the American economy that they can exert roughly twice the pressure on the Dow's movements as the tech sector, and nearly four times the pressure as the health care sector?

Probably not. According to the Bureau of Economic Analysis, the finance and insurance industries accounted for roughly 6.6% of U.S. GDP in 2012. Things look a bit better if you lump this grouping together with real estate services (as the BEA does), which brings the sector's total contribution up to a whopping 19.5% of GDP. But none of the financial companies on the Dow can rightly be called part of the "real estate" industry, even though JPMorgan could loosely claim affiliation by pointing out its mortgage operations.

How should these sectors be rebalanced? Do they need to be? Or is this just another sign that the Dow is simply no longer really relevant to the modern investor? Let us know what you think by leaving a comment below.

Alex Planes owns shares of Intel. Add him on Google+ or follow him on Twitter @TMFBiggles for more insight into markets, history, and technology.

The Motley Fool recommends 3M, American Express, Chevron, Cisco Systems, Coca-Cola, Goldman Sachs, Home Depot, Intel, Johnson & Johnson, McDonald's, Nike, Procter & Gamble, UnitedHealth Group, Visa, and Walt Disney. The Motley Fool owns shares of Coca-Cola, General Electric Company, Intel, International Business Machines, Johnson & Johnson, JPMorgan Chase, McDonald's, Microsoft, Nike, Visa, and Walt Disney. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$33,596.34 (-1.03%) $-350.76
General Electric Stock Quote
General Electric
GE
$85.28 (0.73%) $0.62
Microsoft Stock Quote
Microsoft
MSFT
$245.12 (-2.03%) $-5.08
JPMorgan Chase Stock Quote
JPMorgan Chase
JPM
$131.59 (0.17%) $0.22
Coca-Cola Stock Quote
Coca-Cola
KO
$63.44 (-0.05%) $0.03

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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