Indexy a trhy
Dow Jones: Why the Oldest Index Is Today More Symbol Than Benchmark
Key takeaways
- The Dow Jones contains only 30 American blue-chip companies selected by the editors of the Wall Street Journal — without any mechanical criteria.
- The index weights companies by the price of a single share, not by market capitalisation. A company with an expensive share has more influence even if it is smaller.
- This methodology is outdated and introduces distortions — which is why investors and academics prefer the S&P 500 or total market indices.
- The Dow Jones has exceptional historical value: data goes back to 1896, the longest time series among equity indices.
The Dow Jones Industrial Average (DJIA) is the oldest American equity index, tracking 30 selected blue-chip companies weighted by the price of a single share — a methodology that, from a modern standpoint, makes it more of a historical artefact than a reliable market measure.
History: from 1896 to today
Charles Dow launched the index in 1896. It originally contained 12 industrial companies and was a simple average of their prices. Over the years the composition has changed — today the index includes companies such as Boeing, McDonald's, Johnson and Johnson, and Goldman Sachs. The word "industrial" in the name is a historical relic, not a description of its content.
The composition is chosen by the editors of the Wall Street Journal. There are no fixed quantitative criteria — it is an editorial decision. This gives the index a distinct character but also unpredictability.
Price weighting: a fundamental weakness
Unlike the S&P 500 or MSCI World, the DJIA does not weight companies by their market value but by the price of one share. A company whose shares cost $300 influences the index three times as much as a company with shares at $100 — regardless of how large they actually are.
The practical consequence: a company can conduct a share split (dividing one share into two cheaper ones) and thereby reduce its influence on the index overnight. This has nothing to do with its real value.
When the Dow Jones makes sense
- Historical comparisons stretching back to the nineteenth century
- Quick market sentiment in media coverage
- Tracking blue-chip companies as a group
For understanding the broader American market, the S&P 500 or the analysis of the American market is a more relevant choice. And for global diversification, MSCI World.
FAQ
What is the Dow Jones in simple terms?
An index of 30 selected large American companies, weighted by their share price. It is the oldest American equity index, but its methodology is outdated and the investment community considers it a less reliable market measure than the S&P 500.
Why is the Dow Jones less accurate than the S&P 500?
It contains only 30 companies instead of 500 and weights them by share price, not market capitalisation. A company with an expensive share influences the index more than a larger company with cheap shares. This methodology introduces distortions that modern indices do not have.
Who decides on the Dow Jones composition?
The editors of the Wall Street Journal, which is owned by Dow Jones, Inc. (now part of News Corp). There are no fixed selection rules — it is an editorial judgement, unlike the S&P 500, where a committee decides according to clear criteria.