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An Average That Isn’t
www.investing.com/analysis/an-average-that-isnt-200631708
An Average That Isn’t
By Mike Zaccardi, CFA, CMT | Oct 31, 2022 03:14AM ET VALUE STOCKS ARE having quite the year—at least relative to growth shares. This past week underscored that trend, with the value-oriented Dow Jones Industrial Average (DJIA) rising every day. Barring a big drop today, October will mark the index’s best monthly performance since 1976.
Even as the Dow rallied 5.7% last week, the growth-heavy Nasdaq Composite index rose just 2.2%. For the year, the Nasdaq is down 29%, versus less than 10% for the Dow.
Should you allocate some of your portfolio to the DJIA? I don’t think that’s the most effective way to invest. The Dow is a price-weighted index. That means the higher the stock price of one of the Dow’s components, the heftier its weight in the index. By contrast, most index funds weight their holdings by each company’s market capitalization—the stock price multiplied by the number of shares outstanding.
For example, the biggest holding in the Dow is UnitedHealth Group (NYSE:UNH) (ticker: UNH) at more than 11%. But that stock is just 1.6% of the S&P 500. What about America’s biggest stock by market capitalization, Apple (NASDAQ:AAPL) (AAPL)? After reporting strong third-quarter earnings last Thursday, I calculate it accounts for 6.9% of the S&P 500. But Apple is just 3% of the DJIA, making it the 15th biggest holding among the Dow 30.
Overall, the Dow has 19.4% in the growth-oriented tech sector, compared with the S&P 500’s 25.9%. Meanwhile, the more defensive health care sector is 22.2% of the Dow, but just 15.3% of the S&P 500. The DJIA’s larger relative positions in financials and industrials also give it more of a value flavor.
Still, over the long haul, the DJIA and S&P 500 boast similar returns. A lot of ink has been spilled deriding the DJIA’s price-weighted construct and, indeed, I’ve been among the critics. But in reality, what really matters is being invested.
Since 1998, SPDR Dow Jones Industrial Average (NYSE:DIA) ETF (DIA) has returned 545%, while the SPDR S&P 500 ETF (NYSE:SPY) has notched 523%. Even broad market funds, such as Vanguard’s Total Stock Market Index Fund (VTSAX), have had similar returns to the Dow. The upshot: While such index funds have different holdings, their performance tends to converge over the long term—and investors should fare just fine with any of them.
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An Average That Isn’t
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