The DJIA is a stock index that tracks the share prices of 30 of the largest U.S. companies. Like the S&P 500, the DJIA is often used to describe the stock market’s overall performance.
What Is the Dow Jones Industrial Average?
The Dow Jones Industrial Average, also known as the DJIA or simply the Dow, is a stock index frequently used to gauge the overall performance of U.S. stocks.
Indexes like the DJIA track the prices of a group of securities. An index tries to model a particular industry, market, or even the entire national economy. There are indexes for almost everything, from the overall U.S. stock market and global bond markets to the market for gold. The DJIA is one of the oldest U.S. indexes, first created in 1896.
In its modern form, the Dow tracks the prices of 30 blue-chip stocks. These stocks are from large companies with long histories of solid performance. Because of the prominence of the companies in the Dow and the age of the index itself, experts and financial commentators often use its performance as shorthand to describe the overall stock market.
What Companies Are in the DJIA?
The DJIA contains leading companies from many industries, including information technology, healthcare, and consumer discretionary. The only industries not currently included are transportation and utilities.
The Dow’s composition does not change often. Its holdings have changed 60 times in its lengthy history, or about an average of every two years. Companies included in the Dow are referred to as components.
As of January 2021, the following 30 companies are included in the DJIA:
Companies in the DJIA Index
| Dow Components | Stock Ticker |
|---|---|
| American Express Company | AXP |
| Amgen | AMGN |
| Apple Inc. | AAPL |
| Boeing Co. | BA |
| Caterpillar Inc. | CAT |
| Cisco Systems Inc. | CSCO |
| Chevron Corporation | CVX |
| Coca-Cola Co. | KO |
| Dow Inc. | DOW |
| Goldman Sachs Group, Inc. | GS |
| Home Depot Inc. | HD |
| Honeywell International Inc. | HON |
| International Business Machines Corporation | IBM |
| Intel Corporation | INTC |
| Johnson & Johnson | JNJ |
| JP Morgan Chase & Co. | JPM |
| 3M Company | MMM |
| McDonald’s Corporation | MCD |
| Merck & Co. Inc. | MRK |
| Microsoft Corporation | MSFT |
| NIKE Inc. | NKE |
| Procter & Gamble Co. | PG |
| Salesforce.com Inc | CRM |
| Travelers Companies Inc. | TRV |
| United Health Group Inc. | UNH |
| Verizon Communications Inc. | VZ |
| Visa Inc. | V |
| The Walt Disney Company | DIS |
| Walgreens Boots Alliance Inc. | WBA |
| Walmart Inc. | WMT |
How Are Stocks Weighted on the DJIA?
The DJIA is a price-weighted index. This means that the Dow gives more weight to companies with a more expensive stock. The DJIA’s price weighting does not account for market capitalization, the total market value of a company’s shares. Because of this, companies with fewer expensive shares have a more considerable impact on the Dow’s value than companies with many cheaper shares.
The Dow’s approach is unlike other leading indexes that track the stock market’s overall performance, like the S&P 500 or the NASDAQ. These consider a company’s market capitalization when determining how much influence it will have in an index.
The difference in how the Dow weighs its index can lead it to have more short-term ups and downs than market-cap-based indexes.
How Does the DJIA Compare to Other Indices?
The Dow is one of a few equity indexes used to measure and understand the performance of the U.S. stock market. Here’s how it compares to two other common stock indexes.
DJIA vs. S&P 500
Because it tracks the performance of 500 of the largest public companies, the S&P 500 is much broader in scope than the DJIA. Unlike the DJIA, the S&P 500 is market capitalization-weighted, not price-weighted. Because it’s more diversified and considers companies based on market cap, it may be a better indicator of the overall stock market’s performance.
Here’s how that plays out: When Company XYZ’s share price of $2,000 falls to $1,999, its decrease may be disproportionately felt in the Dow due to the high share price. If Company XYZ has relatively few shares (and therefore a smaller market cap), that dip won’t be felt as strongly in the S&P 500 as it would in the Dow, where its high price commands more clout.
This difference in price weighting versus market-capitalization weighting can cause the DJIA to be more volatile than the S&P 500 short term. Price drops that are small percentages of share prices may have outsize impacts on the Dow in companies with smaller market caps but expensive shares.
That said, long term, the Dow and S&P 500 have had similar performance: From January 1920 to 2020, the DJIA averaged 10.1% annual returns, with dividends reinvested, while the S&P 500 averaged 10.3%.
DJIA vs. NASDAQ
The NASDAQ 100 aggregates 100 of the largest and most actively traded non-financial domestic and international stocks on the NASDAQ Stock Market.
Like the S&P 500, the NASDAQ uses a market-cap weighting formula. Stocks must meet specific requirements to be included, such as maintaining a minimum daily trading volume of 100,000 shares and having been traded on the NASDAQ for at least two years.
Unlike the S&P 500 and the Dow, NASDAQ contains some foreign companies and is heavily skewed to tech companies. For these reasons, the NASDAQ may reveal less about the overall U.S. stock market and tell you more about the economic performance of the global tech industry.
Over the last 10 years, the NASDAQ has averaged 42.6% annual returns, while the DJIA has averaged 12.6%. However, remember that its strong returns are mainly due to the number of tech stocks it holds.
How to Invest in the DJIA
Because its components are among the most prominent public companies, the DJIA can be a proxy for the performance of the overall U.S. economy. Many investors choose index funds that are based on the Dow. When you buy a single share of a DJIA index fund, your portfolio gets exposure to all 30 Dow components. This gives you easy exposure to companies with a proven track record of returns and solid business practices.