The Dow Jones Industrial Average has been outperforming the S&P 500 (SPY) this year thanks in part to a trio of high-flying stocks at the top of the Dow and a relatively lower weighting in financial stocks, a market strategist said Friday.
The Dow has truly been the “rock star” large-cap stock index of 2011, said Nicholas Colas, chief market strategist at ConvergEx Group.
However, Caterpillar shares slipped 6% on Friday after the company’s earnings missed expectations.
The Dow and S&P 500 have key differences. The Dow is a “price-weighted” index, meaning that stocks with high share prices account for a larger portion of the index. The S&P 500, meanwhile, weights stocks by their market capitalization, or the share price multiplied by the number of shares outstanding.
IBM, Caterpillar and Chevron are the three largest holdings in the Dow ETF at 11%, 6.6% and 6.5%, respectively.
The Dow has added 1,147 points year to date, with IBM accounting for 301 points, Chevron representing 135 points and Caterpillar adding 133 points, according to Colas.
“Those three names are responsible for over 50% of the Dow’s entire advance in 2011,” the strategist wrote in a note Friday. IBM shares are up about 27% so far this year.
Differences in sector allocations between the Dow and S&P 500 are also having an impact.
“Putting this performance together with the notion that financials haven’t been winning investments in 2011 and you’ll see why the Dow has crushed the S&P 500 year to date,” Colas added. “Financials are only 9.4% of the Dow, but 14.7% of the S&P 500.”
SPDR Dow Jones Industrial Average ETF - (click chart to expand)