The Dow Jones Industrial Average (^DJI 0.88%) is one of the three primary stock market indexes most investors follow closely. Created in 1928 to track large blue-chip stocks, it has remained an important gauge of the market's performance for nearly a century.
Here are three things you might not know about the Dow.
One thing many people don't realize about the Dow is that the average has seen a lot more changes recently than it did in the past. Just since 2008, the Dow has made changes to its components on six separate occasions, switching out 10 pairs of stocks. During the middle part of the 20th century, the Dow was far more stable, undergoing just two changes from late 1939 to early 1976.
Admittedly, the financial crisis was responsible for much of the turnover in the Dow, and in that regard, the period resembles what the Dow went through leading up to and during the Great Depression. In the 1920s, before the stock market crash, the Dow made changes 11 times, and the 1930s brought seven more shifts to the constituent list. Nevertheless, the Dow has done a good job of following major changes in the makeup of the U.S. economy while switching companies in and out far less frequently than other major market benchmarks, like the S&P 500 and the Russell 2000.
Even with more frequent changes, the stability of the Dow is one reason investors like to use it as a benchmark for the health of the U.S. stock market as a whole.
Evan Niu, CFA
Most investors are aware that the Dow is a price-weighted index, so stocks with higher individual share prices carry more weight regardless of the company's market cap. It's a somewhat antiquated methodology, but that hasn't dampened the index's popularity. The Dow remains one of the most widely followed indexes that are quoted on a daily basis.
But every time the Dow's underlying components change, the divisor that acts as the average's denominator must also change. This is done in order to maintain continuity for the index's numerical value, which is around 16,000 today. Most of the time, the divisor is adjusted to account for constituent stocks being replaced within the index or for stock splits or special dividends.
However, what most investors may not realize is that the Dow has changed 230 times since its inception in 1928. The original divisor was 16.67, but it's currently 0.14985889030177. The Dow has picked up quite a few decimal places over the past 88 years; the most recent change was in March 2015. You can find a complete history of the Dow's divisor changes here.
Something else people may not know about the Dow Jones Industrial Average is that the name of this closely watched index isn't entirely accurate -- rather it's a historical artifact. Created in 1896, the Dow Jones Industrial Average is a price-weighted index that tracks the performance of 30 of the largest public companies in the United States. Since its inception, this index has broadened its scope to include top blue-chip companies in a diverse range of sectors, such as consumer services, technology, and healthcare.
Big Pharma stocks Johnson & Johnson, Merck & Co., and Pfizer, for instance, are all important components of the Dow Jones Industrial Average. The primary reason these particular names are part of this major index is that J&J, Merck, and Pfizer are all considered bellwether stocks in the pharmaceutical industry. After all, J&J sports the most productive clinical pipeline for new pharma products over the last five years, and Pfizer and Merck have been struggling with the so-called patent cliff that has eroded top-line growth among some of the bigger names in pharma.
This "bellwether" theme essentially ties together all of the blue chips included in the Dow Jones Industrial Average, making it a great way to take stock of the health of the U.S. economy as a whole.