Understanding the Dow Jones Industrial Average (DJIA)

Birth of the Dow Jones

The Dow Jones Industrial Average was established on May 26, 1896. The Dow was created by Charles Dow, one of the founders of Dow Jones & Company (which was established in 1882). The first index created by Dow dates back to 1884 and consisted of 11 stocks related to the transportation sector.

Changes Over Time

In 1916, the Dow Jones index was updated to include 20 stocks. By 1928, the index grew to 30 stocks. Decisions regarding the companies listed in the Dow are made by a committee composed of representatives from S&P Dow Jones and editors of the Wall Street Journal.

Companies in the Dow Today

The most recent updates to the index occurred on August 31, 2020. Amgen, Honeywell, and Salesforce were added, while ExxonMobil, Pfizer, and Raytheon were removed. The 30 companies that currently comprise the Dow are:

Criticisms of the Dow Jones Industrial Average

One common criticism of the Dow Jones calculation is that a company with a share price of $100 impacts the index five times more than a share priced at $20, even if the company’s market value is ten times greater. The index’s dynamic divisor is adjusted in corporate event scenarios, stock splits, and stock dividends to mitigate this flaw.

Conclusion

The Dow Jones Industrial Average has changed significantly over the past 100 years and will continue to evolve with the economy. Although it is not the broadest measure of economic health, the history and composition of the Dow can help you understand a common financial term.

Frequently Asked Questions (FAQs)

How can I invest in the Dow Jones Industrial Average?

There are many mutual funds that mimic the Dow Jones Industrial Average. Buying shares in those funds is like buying pieces of the Dow. There is also an exchange-traded fund (ETF) that trades under the ticker DIA and mimics the Dow’s performance. However, you should be cautious when investing in any other ETFs that claim to track the Dow; they may be leveraged or inversely correlated.

What are the Dow Jones Sustainability Indices?

There are several versions of the Dow Jones Industrial Average aimed at achieving environmental, governance, and social sustainability objectives. These versions are collectively referred to as the Dow Jones Sustainability Indices (DJSI), but they differ significantly. Some are general ESG indices for specific regions, such as the United States or Korea. Others may have specific exclusions for certain sectors, such as a European index that excludes companies involved in weapons, tobacco, alcohol, and adult gambling or entertainment.

Source: https://www.thebalancemoney.com/understanding-the-dow-jones-industrial-average-djia-357912