End of the DJIA?

Dow Jones & Co. has begun searching for potential buyers of its stock market indexing unit, which includes the widely-reported Dow Jones Industrial Average.

The unit of Dow Jones, which publishes the Wall Street Journal and was purchased by News Corporation (NWS) in late 2007, creates and licenses indexes for use by ETFs, mutual funds, and other products.

In addition to the storied DJIA, the Dow Jones indexing unit is responsible for the creation and oversight of:

• Dow Jones U.S. Select REIT Index: Tracked by RWR
• Dow Jones Global ex-U.S. Select Real Estate Securities Index: Tracked by RWX
• DowJones-UBS Commodity Index Total Return: Tracked by DJP
• Dow Jones Islamic Market International Titans 100 IndexSM: Tracked by JVS

According to the Wall Street Journal’s Dennis Berman and Jeffrey McCracken, MSCI Inc., a former unit of Morgan Stanley, is one of the leading contenders to purchase the indexing unit. MSCI maintains dozens of indexes, and is perhaps best known for its line of European and emerging markets benchmarks, a number of which are tracked by iShares ETF products.

The name of the Dow Jones Industrial Average is unlikely to change following any transaction. Given its broad name recognition, it would be unlikely that a buyer would rebrand the index. Moreover, there are reports that any deal would require that the Dow Jones name remain. The impact on the ETF world would be largely cosmetic – funds tracking Dow Jones benchmarks would require a name change, but it is unlikely that an acquirer would shuffle holdings of any major indexes prior to regular rebalancing dates.

The Dow Jones Industrial Average was introduced in 1896 by Charles Dow, and has since become the world’s best-known stock market indicator despite some serious flaws that impact its ability to accurately reflect broad market movements. The DJIA is a price-weighted index, meaning that it is influenced more heavily by companies with higher share prices (an arguably arbitrary metric, given the ability of companies to split and reverse split shares).

Second, the benchmark is comprised of only 30 individual securities, meaning the benchmark lacks sufficient diversification, particularly to small- and mid-cap companies.

Disclosure: No positions at time of writing.

Comments

[j-dub:]

The beginning of the the PIZZA HUT index
"30 different toppings, 30 different American dreams."


OR


The Nintendo industrial average
"Now you're playing with power-financial power."

Aug 24 03:29 PM

[Roger Knights:]

One change I'd like to see would be for the opening price of the Dow to be made up of the first trade price of the day for all 30 stocks in the index. (They do compute this, but call it another name.) But the Dow people apparently want to give the market an indication of "Is the market up or down?" immediately. So the typical opening price contains less than 10 of the 30 components' first trades that day--the remainder are assigned their prior day's closing price. This gives a misleading picture of the day's price action, and messes up its candlestick chart patterns. For instance, a day that might show as a star doji on the S&P index would not on the DJIA. If the market wants an instant price quote on the Dow made up of only a few of its components, it can be accommodated, but that number should be called a Preliminary Opening figure.

Aug 24 06:59 PM