With four of its larger components reporting earnings since yesterday’s close, there have been some moderate changes in the weightings hierarchy of the thirty components of the Dow Jones Industrial Average (DJIA). Before going further, for those unfamiliar with the way the DJIA is constructed, the index is made up of 30 stocks which are weighted based on their price. Therefore, stocks with higher share prices have a higher weighting, while those with lower share prices have a lower weighting. Therefore, regardless of how large a company is in terms of revenues, earnings, or market cap, if it has a high relative share price, it gets a larger weighting in the DJIA. The only place where stock splits really matter is when they occur among DJIA components, where a 2-1 split will immediately result in a company having its Dow weighting cut by essentially half.
With that explanation out of the way, the table below lists the 30 Dow components and their individual weightings in the index. With today’s better than expected earnings report, Goldman Sachs (GS) now has the largest weighting in the index ahead of 3M and IBM. Even after its weak earnings report on Monday evening, IBM holds on to the third spot, but with UnitedHealth (UNH) putting up a strong report this morning, the gap between the two has really narrowed. One standout stock with respect to its weighting in the index is Apple (AAPL). Despite being the largest publicly traded company in the United States, AAPL only has the 7th highest weighting in the Dow, even though its market cap is greater than the combined market caps of Goldman (GS), 3M (MMM), IBM, UnitedHealth (UNH), and Boeing (BA)! With a share price of less than $60, Microsoft’s (MSFT) weight is even more distorted at 2.2%, even though its market cap is equal to the combined market caps of the DJIA’s four largest components.
Whatever the shortcomings are for the way the DJIA is constructed, though, the index has withstood the test of time, and whenever someone from Main Street wonders how Wall Street is doing, they ask, “Where’s the Dow?” Yes, there are some years where the awkward construction of the DJIA creates wide divergences between its return and broader measures of the US equity market like the S&P 500, but more often than not, the DJIA tracks the S&P 500 pretty closely. This year, for example, the YTD returns of the two indices are within 50 bps of each other as the S&P 500 is up 4.7% while the DJIA is up 4.2%.