GM Belongs in the Dow (At Least for Now)

By Jim Wiandt

Matt Hougan is looking for the indexes to go rogue on us.

Matt laid out some definitions in his last blog. Here's another one for you: Active management (also called active investing) refers to a portfolio management strategy wherein the manager makes specific investments with the goal of outperforming an investment benchmark index. (I pulled that off of Wikipedia since ordinary dictionaries don't see fit to include a definition of "active management").

Matt is effectively criticizing John Prestbo and the editors at Dow Jones for not being active managers. Selectively removing GM from their new global index on the basis of its impending doom or bailout while it remains in the good old Dow would certainly seem active. And that might be a bold step to take when (and it certainly makes sense) all of the other Dow Jones constituents are in the Global Dow - just like all of the S&P 500 constituents are in the S&P 1500.

Those two indexes - the two most famous indexes in the world - are already suspect enough because they operate by committee that to allow such a bald-faced active move against the main Dow might just be a bit too much. 

I think it's hilarious that the two most referred-to indexes in the world are hand-selected. Is this irony not lost on people? And yes, constituents are carefully selected to represent a portion of the U.S. market (large-cap stocks more or less) by sector weighting, size, etc. But if you think that Blitzer and Prestbo are not aware of performance and are not tempted in the least to think about the performance of the index when they and their committees are selecting constituents for the indexes, I've got a bridge in London I'd like to sell you.

And that, I think, is just funny. Given what indexing is.

Should GM be removed from the DJIA? It will probably come. But the Dow is not exactly a fast-moving entity, and I'm not sure we want it to be. It's the Dow. Continuity, stability ... all that. So let's not take two indexes that have already had active aspersions cast upon them take the full plunge into stock-picking adventures.