The Dow Jones Industrial Average (^DJI -0.12%) is America's most-watched index, and it's given us a lot of insight into the changing U.S. economy over the years. In our ongoing quest to learn more about the Dow and its 30 members, we've examined the age of its components, the frequency of its changes, the value and financial strength of its representative companies, and the people who make these companies tick. Today we'll look at what the Dow might look like if it were built a little different. Let's dive right into a Dow chosen by market cap alone.
1. Barely half of the Dow's components are among America's 30 most valuable companies
The Dow is notable for focusing on well-established large-cap representatives of the American economy, but in the interest of balance it's had to trade off a bit. There are currently 18 Dow components among the 30 most valuable publicly traded companies on the market, with Intel (INTC -1.60%) clinging to 30th place with a $130 billion market cap. While the other 17 top-30 components are fairly secure in their ranks for the moment, Intel has been battling neck and neck with Schlumberger (NYSE: SLB) for that final spot for months, which means there might soon be only 17 Dow components on the top 30 list:
INTC Market Cap data by YCharts.
2. Tech would be king if the Dow chose its components purely by market cap
America's largest companies show a distinctly high-tech slant, as nine of the top 30 by market cap are technology companies -- at least if you count Amazon.com (NASDAQ: AMZN), which could also be credibly classified as a retailer. However, some sectors, particularly manufacturing, would find themselves with far lesser representation under this "rebalancing." Here's what the Dow's makeup looks like today, and what it would look like with a hypothetical 30-largest-companies composition:
|
Sector |
Number of Companies Included in the Dow Today |
Number of Companies of the 30 Largest on the Market |
|---|---|---|
|
Financial |
6 |
6 |
|
Industrial |
4 |
1 |
|
Technology and Telecoms |
6 |
12 |
|
Energy |
2 |
2 |
|
Health Care |
3 |
3 |
|
Basic Materials |
2 |
0 |
|
Retail and Consumer Goods |
7 |
6 |
Source: iWeblists.
All of the Dow's tech and telecom components are already among the top 30, but the addition of Amazon, Apple (NASDAQ: AAPL), Google (NASDAQ: GOOG) (NASDAQ: GOOGL), Oracle (NYSE: ORCL), Facebook (NASDAQ: FB), Qualcomm (NASDAQ: QCOM), and Comcast (NASDAQ: CMCSA) would cost a half-dozen current components their spots. And while the financial sector maintains the same level of representation before and after this swap, it would wind up with four new components -- three megabanks and Berkshire Hathaway (NYSE: BRK-B) -- since only Visa (NYSE: V) and JPMorgan Chase (JPM -0.40%) have sufficiently hefty market caps to rank among America's 30 largest companies.
Source: Ekolist via Wikimedia Commons.
3. Dow components' average age wouldn't change much if they were chosen by market cap
The average Dow component was founded more than a century ago -- half of the Dow's 30 components trace their origins to the 19th century, and one (JPMorgan Chase) has its roots at the tail end of the 18th century, a mere few years after America's founding fathers won their war for independence. The average Dow company is 111 years old, but since so many of America's 30 largest companies are also Dow components, the average age of this elite group isn't much younger at 98 years old.
The youngest of these megacap monsters is Facebook (NASDAQ: FB), which hasn't hit puberty yet at 10 years old, but dot-com juggernauts Amazon and Google also skew this size-based group younger with founding dates of 1994 and 1998, respectively.
4. Tech would also be king if the Dow weighted its components by market cap
There might be six tech and telecom companies in the Dow today, but the index's price-based weighting scheme punishes the sector with four of the six smallest weights out of all 30 components. However, things would look quite different if we simply weighted each component based on its market cap, especially since many of the Dow's financial representatives, which boast among the highest share prices of all 30 components, account for four of the eight smallest market caps in the Dow:
|
Sector |
Current Dow Weight |
Weight by Current Market Cap |
True Economic Weight* |
|---|---|---|---|
|
Financial |
27.6% |
12.6% |
7.6% |
|
Industrial |
14.6% |
11.1% |
7.6% |
|
Technology and Telecoms |
13.9% |
24.2% |
12% |
|
Energy |
8.3% |
14% |
5% |
|
Health Care |
7.2% |
13.1% |
8.2% |
|
Basic Materials |
7.8% |
3.2% |
5.3% |
|
Retail and Consumer Goods |
20.8% |
21.9% |
15% |
Sources: IndexArb, iWeblists, and U.S. Bureau of Economic Analysis.
* Sector weighted by combining all relevant sub-sectors and recalculating as a percentage of private GDP, which accounts for 86.5% of total U.S. GDP.
5. Financial stocks are the kings of the Dow, but were the last to be added
There were no financial stocks -- no banks, no insurance companies, and no credit card networks -- on the Dow until American Express (AXP -0.31%) was added in 1982. Today, six money-moving companies make up over a quarter of the Dow's entire value by weight, giving financials as much heft as the manufacturing and tech sectors combined. Two of the Dow's six financial components were added last year, and four of the six have joined since the Great Recession's bear market ended in 2009.
You might think tech companies would be the most recent additions, but IBM (IBM -0.35%) has been part of the Dow since 1979, beating AmEx into the index by three years. IBM was actually a member of the Dow from 1932 to 1939 as well, so tech companies have several decades on the financial sector when it comes to representing America's economy.
