Associated press
Earlier this week the S&P Dow Jones Indices announced changes to the Dow Jones Industrial Average index, which tracks the stock performance of 30 large cap companies. Beginning Monday, August 31, Exxon, Pfizer, and Raytheon will be dropped from the index and replaced by Salesforce, Amgen and Honeywell.
If you follow financial news, you may hear about the Dow Jones Industrial Average all the time, but what is it exactly?
It is a price-weighted index that tracks 30 large public US companies. It is the second-oldest index, having been first calculated on May 26, 1896 by Charles Dow, the editor of the Wall Street Journal, and statistician Edward Jones. In the past it represented companies involved in heavy industry and has since evolved to include companies in the healthcare, consumer discretionary, financial, technology, consumer staples, communication services, energy and materials sectors. It is widely regarded as a rather inaccurate representation of the broader US economy but is nevertheless widely followed. You may have heard of passive investing in which you buy and hold index funds- if you were to buy an ETF that tracks the Dow and held it long-term - $DIA is such an ETF ($IYY is less representative) - then you would be considered to be engaging in index fund investing.
One benefit of index investing is the ability to diversify your portfolio at a low cost. If you were to buy a single share of every Dow Jones component, that would cost you about $4,100. ETFs make it easier and more affordable to do this by pooling their assets under management (AUM) and creating a portfolio of stocks invested exclusively in Dow components, which you can then buy into at a fraction of what it would cost to do it yourself.
ETFs constantly adjust the proportionate share of each stock they own so that the overall portfolio tracks the performance of the DJIA index (or whichever index it is designed to track). Any deviation between the ETF’s performance and the underlying index is due to timing differences when the ETF rebalances, the expense ratio of the ETF (the cost of running the fund, including portfolio managers’ salaries), and tracking error resulting from bid-ask spread differences arising from the volume of the orders created by larger funds and institutions when they go about rebalancing their portfolios.
So instead of paying $4,100 to build a Dow portfolio on your own, you can instead buy a share of the SPDR Dow Jones Industrial Average ETF ($DIA) for $286.70 (as of August 28), giving you exposure to the performance of the DJIA.
“When you buy DIA, what exactly do you own?” The Dow components comprising the holdings of the DIA ETF, beginning August 31, will include (prices as of August 28):
3M (MMM) - St. Paul, MN - $165.66
Industry, worker safety, US health care and consumer goods
96,163 employees
$95 billion market cap
American Express (AXP) - New York, NY - $102.54
financial services, credit cards
59,000 employees
$82.5 billion market cap
Apple Inc (AAPL) - Cupertino, CA - $499.23 (before stock split)
consumer electronics, computer software and online services
137,000 employees
$2.1 trillion market cap
Amgen (AMGN) - Thousand Oaks, CA - $253.12
biotech, recombinant DNA technology
23,400 employees
$148 billion market cap
Boeing (BA) - Chicago, IL - $175.80
aerospace and defense; aircraft, rockets, satellites, telecom equipment, missiles
161,100 employees
$99 billion market cap
Caterpillar (CAT) - Deerfield, IL - $143.63
construction and mining equipment
102,300 employees
$77 billion market cap
Chevron (CVX) - San Ramon, CA - $85.63
integrated energy, chemicals and petroleum operations
48,200 employees
$160 billion market cap
Cisco (CSCO) - San Jose, CA - $42.20
networking hardware, software, telecom equipment, and other high-tech services and products
75,900 employees
$178 billion market cap
Coca-Cola (KO) - Atlanta, GA - $49.83
owns/license non-alcoholic beverage brands
86,200 employees
$214 billion market cap
Dow (DOW) - Midland, MI - $46.05
plastics, chemicals and agricultural products
36,500 employees
$34 billion market cap
Goldman Sachs (GS) - New York, NY - $207.71
investment banking and financial services
39,100 employees
$71.5 billion market cap
Home Depot (HD) - Atlanta, GA - $286.29
tools, construction products and services for home improvement
415,700 employees
$308 billion market cap
Honeywell (HON) - Charlotte, NC - $168.38
diversified tech and manufacturing, including aerospace, home and building technologies, performance tech and safety and productivity
113,000 employees
$118 billion market cap
International Business Machines (IBM) - Armonk, NY - $125.07
hardware, middleware, software, hosting and consulting services ranging from mainframe computers to nanotechnology
352,600 employees
$111 billion market cap
Intel (INTC) - Santa Clara, CA - $50.43
semiconductor chip manufacturing, microprocessors, personal computers
110,800 employees
$214 billion market cap
Johnson & Johnson (JNJ) - New Brunswick, NJ - $153.64
medical devices, pharmaceutical and consumer packaged goods
132,200 employees
$404 billion market cap
JPMorgan Chase (JPM) - New York, NY - $102.77
investment banking and financial services
256,710 employees
$313 billion market cap
McDonald’s (MCD) - Chicago, IL - $214.91
fast food restaurant franchisor
205,000 employees
$160 billion market cap
Merck (MRK) - Kenilworth, NJ - $85.65
pharmaceuticals; therapeutic and preventative agents for a variety of diseases
71,000 employees
$216 billion market cap
Microsoft (MSFT) - Redmond, WA - $228.91
computer software, consumer electronics, personal computers and related services
163,000 employees
$1.7 trillion market cap
Nike (NKE)- Beaverton, OR - $112.29
footwear, apparel, sports equipment, accessories and services
75,400 employees
$175 billion market cap
Procter & Gamble (PG) - Cincinnati, OH - $138.77
personal health, personal care and hygiene products
99,000 employees
$345 billion market cap
Salesforce.com (CRM) - San Francisco, CA - $271.10
cloud-based software providing customer relationship management (CRM) services
49,000 employees
$244 billion market cap
Travelers (TRV) - St. Paul, MN - $115.89
personal, business, and bond and specialty insurance
30,800 employees
$29 billion market cap
UnitedHealth Group (UNH) - Minnetonka, MN - $314.37
health care products and insurance services
325,000 employees
$299 billion market cap
Verizon (VZ) - New York, NY - $59.26
communications and entertainment products and services
135,300 employees
$254 billion market cap
Visa (V) - San Francisco, CA - $215.71
payments technology through credit cards, debit cards and prepaid cards
19,500 employees
$459 billion market cap
Walmart (WMT) - Bentonville, AR - $140.30
grocery stores, discount department stores and hypermarkets
2,200,000 employees
$397 billion market cap
Walgreens (WBA) - Deerfield, IL - $38.76
holding company of pharmaceutical manufacturing, wholesale and distribution companies
232,000 employees
$33.5 billion market cap
The Walt Disney Company (DIS) - Burbank, CA - $135.54
mass media and entertainment; television, publishing, films, music, video games, amusement parks, broadcasting, radio, web portals, licensing
223,000 employees
$245 billion market cap