Dow Changes Strip Index of Its Distinctiveness

By Matthew Hougan

Cigarettes and airplanes are out, while energy and finance are in. Interesting...

I know that the Dow Jones Industrial Average is an archaic index, with its unusual price-weighting schema and its limited representation of the investable universe. It's an anachronism in an age of scientific indexing theory.

But still, it's a great index ... the first one ... and its very history gives it important meaning. Plus, when people talk about the market falling (or rising), they still mean the Dow. If the Dow plunges 300 points, you know it's bad; if the S&P falls 40 points, big deal.

So it's interesting to see John Prestbo and company shake up the index today, with Altria and Honeywell leaving the index and Chevron and Bank of America coming in. It strikes me as truly unusual that Chevron has entered and exited the index twice before ... it seems to underlie the quirkiness of this market measure.

Looking at these changes, I worry that the Dow is losing a bit of its distinction. I don't know if this is a good thing or a bad thing, but take a look at the table below comparing the sector weights of the DJIA before the changes, the DJIA after the changes and the S&P 500.

	Dow Before Change	Dow After Change	S&P 500
Consumer Discretionary	9.44%	9.33%	8.33%
Consumer Staples	16.42%	11.41%	10.55%
Energy	5.45%	10.61%	12.44%
Financials	11.04%	13.69%	17.99%
Health Care	8.6%	8.49%	12.36%
Industrials	25.96%	21.83%	11.78%
Materials	5.28%	5.22%	3.49%
Technology	12.94%	12.79%	15.51%
Telecom	4.86%	4.8%	3.40%

The new changes significantly bring the Dow in line with the S&P sector weightings. Consumer Staples falls from seriously overweight to almost in line, while Energy rises from seriously underweight to almost in line. Meanwhile, the Financials creep up toward S&P levels and the Industrials fall back a bit closer to "the market," although they at least remain almost double-weighted.

I always like it when I listen to the news on the radio and they rattle off the changes in the S&P 500, the DJIA and the NASDAQ. With those three numbers, I've always been able to triangulate about what happened in the market ... which sectors did well and poorly; how breadth looked; the spread between small-caps and large-caps. It'll get a little bit harder to do that once the new changes are made.

Still, I guess, out with the old and in with the new. At the very least, it's good news that we're quitting the cigarette habit in this key measure of the market.