While there are many thousands of indices bearing the Dow name, the Dow Jones Industrial Average (DJIA) is by far the most well-known.
The DJIA tracks the performance of just 30 of the largest companies based in the US. Today, the index includes companies across a range of sectors, including big household names such as Apple, Coca-Cola, JP Morgan Chase and Boeing.
What is Dow index?
The first Dow indices were created at the end of the 19th century by journalist Charles Dow, editor of the Wall Street Journal newspaper and co-founder of Dow Jones & Company.
Although the DJIA is by far the most famous of the Dow indices, the first index established by Charles Dow was the Dow Jones Transportation Average (DJTA) in 1884.
Charles Dow established the DJIA just two years later, initially indexing the performance of 12 industrial stocks. Behemoth General Electric is the only one of the original 12 that remain in the index today.
S&P Dow Jones
The DJIA, along with the thousands of other indices that bear the Dow name, are now part of the S&P Dow Jones Indices joint venture, which is majority owned by S&P Global.
Certain Dow indices track the performance of specific sectors of the US equity market, while others have an investment style or size bias. There are also many Dow branded indices that measure the performance of global equities and non-US stocks.
For instance, the Dow Jones Global Titans 50 index measures the performance of 50 of the largest blue chip stocks listed in the US, continental Europe, the UK and Japan.
S&P Dow Jones also has a family of global sustainability indices bearing the Dow name. They only include companies that are deemed to operate in a sustainable and ethical manner.
A its inception in 1886, the DJIA stood at 62.76. Overexuberance on the part of investors during the bubble of the 1920s saw the index peak at 381.17 in September, 1929.
The Wall Street Crash of October, 1929 and the Great Depression that followed saw the index plunge by around 90%, closing at a low of 41.22 in July, 1932.
The economic boom that followed World War II saw the DJIA make solid gains, reaching the 206 mark by the end of the 1940s, though still well below its 1929 peak.
However, the tail-end of the post-war reconstruction boom saw the index make further progress during the 1950´s, reaching the 616 level by the end of the decade.
While the index continued to advance during the 1960s, the following decade was a difficult one for investors, amid sluggish growth and high inflation.
Peaks and troughs
The DJIA was less impacted by the dot-com boom and bust than certain other indices, which had a higher proportion of technology stocks.
Nevertheless, the DJIA advanced by over 300% during the 1990s, closing above the 11,000 level for the first time in 1999. It reached a peak of 11,723 in January, 2000. During the bear market that followed, the DJIA fell to a low of 7,986 in September, 2002.
Prior to the onset of the global financial crisis, the index had risen to a new peak of 14,093 in October, 2007. During the sell-off that followed, the index had reached a low of 6,627 in March, 2009, a peak-to-trough fall of around 53%.
Unprecedented accommodative measures from the Federal Reserve and other major central banks, with ultra-low interest rates and quantitative easing, have helped the DJIA to rally strongly over the past several years.
By June, 2017, the DJIA had touched an all-time high of 21,529, an increase of around 225% from its trough some eight years earlier.
The volatility of the DJIA is modestly higher than certain other high profile large-cap indices. This is to be expected as the DJIA is comprised of just 30 stocks, a much lower number of constituents than many of the other closely watched indices.
For instance, the DJIA´s annualised volatility over five years is 10.21% compared with 10.1% for the FTSE 100 and 9.64% for the S&P 500.
In general, volatility tends to increase during difficult times such as recession. In common with other major indices, the DJIA is currently seeing some of the lowest levels of volatility in its history, suggesting that investors currently perceive little prospect of a downturn.
Along with the DJIA, those Dow indices with “average” in their name stand out from many other indices in that they are price weighted rather than market cap weighted. These include the aforementioned DJTA as well as the Dow Jones Utilities Average and the Dow Jones Composite Average.
It means that unlike other indices where weightings are impacted by both changes in stock prices and the number of shares outstanding, indices such as the DJIA are only affected by share prices.
However, instead of just summing firms´ stock prices and dividing by the number of companies in the index, a divisor is now used to smooth out the impact of corporate actions that affect the number of shares outstanding.
Dow companies: in or out?
The editors of the Wall Street Journal decide whether any stock within the DJIA should be replaced with a more deserving name. Their objective is to ensure that the index reflects the true blue chip leaders of the US economy.
It goes without saying that companies promoted to the DJIA are generally seeing some upward trend in their underlying business, while those on the way out could be experiencing some difficulties.
Over the course of its 130-year history, the DJIA has been changed 54 times. The last change to the index was in 2015, when AT&T was dropped in favour of Apple. This was a case of a new technology company replacing an old one.
Two years earllier, Bank of America, Alcoa and Hewlett-Packard were substituted with Goldman Sachs, Visa and Nike.
In 2009, the financial crisis and the great recession that followed saw General Motors and Citigroup dropped from the index in favour of Cisco Systems and Travelers.
Given its incredible longevity, the DJIA is essentially the grandfather of all the other major indices. Old economy firms are still very much part of the index, though General Electric is the only company to have survived its 130-year existence.
The fact that Apple is the most recent addition to the index says much about the times we live in today.
Being an index of just 30 blue chip firms, it is something of a highly-exclusive club. Promotions and relegations from the index are always closely watched events and the decisions behind the rotations are prone to some subjectivity.
Nonetheless, the DJIA remains one of the most widely followed indices in the world and is likely to remain so for some time to come.