Dow Jones Index

Composition of the Dow Jones

At its inception, the Dow Jones consisted of twelve stocks. It wasn't until 1928 that the index reached its current number of thirty stocks. The composition of the Dow Jones changes regularly. Often, including large companies such as Coca-Cola, Walt Disney and Goldman Sachs.

A committee determines the composition of the Dow Jones Industrial Average. This ‘Index Committee’ consists of three representatives from S&P Dow Jones Indices and two representatives from The Wall Street Journal. Changes can be made at any point in time. The committee meetings are strictly confidential because alterations to the Dow Jones composition can be sensitive information that investors may base their decisions on.

The Dow Jones index contains companies with a good reputation

There are no fixed rules determining which stocks are included in the Dow Jones. However, an important requirement for companies to be included in the index is that they must be based in the United States (US). Companies need to have their headquarters in the US and generate the highest revenue there compared to other regions.

Furthermore, a stock is only added to the Dow Jones if the company has an excellent reputation, shows long-term growth and attracts many investors. Additionally, having a good sector diversification is an important requirement during the selection process.

How is the Dow Jones calculated?

The Dow Jones Industrial Average is a price-weighted index. This means that the stock price determines the weight of each stock in the index calculation. To determine the index value, the prices of the thirty stocks are added and divided by the so-called divisor. Therefore, the Dow Jones value is a kind of average. S&P Dow Jones Indices adjusts the divisor when actions are undertaken that can affect the stock price. These actions include stock splits, stock issuances or dividend payments.

Dow Jones Price Return and Total Return

The Dow Jones Industrial Average has both a price return and a total return index. The ticker for the former is .DJI, and for the latter, it’s .DJITR. A price return index does not consider dividend payments, while a total return index does. The total return index assumes that dividends are reinvested. Investors and the media usually refer to the Dow's price return index when discussing its value.

Buying individual stocks in the Dow Jones

There are different ways to invest in the Dow Jones. You can purchase individual stocks that are part of the index. All thirty companies in the Dow Jones have an exemplary reputation, often with a long corporate history. In theory, it's possible to replicate the index by buying all thirty stocks yourself. However, there are drawbacks. Firstly, many of the stocks in the Dow Jones have a high share price, requiring a significant investment to buy all of them. Additionally, the index composition occasionally changes, which means you, as an investor, need to actively monitor and make the necessary adjustments. Another way to invest in the Dow Jones is through an actively managed fund or an exchange-traded fund (ETF).

Investing in the Dow Jones with ETFs

An ETF is a product that tracks an index, commodity, bond or a combination of products. The goal of an ETF is for its performance to closely match the value of the underlying products. While owning a share makes you a partial owner of a company, with an ETF, you are buying a product that simply tracks the value of the underlying assets. To minimise deviations in performance, the issuer of the ETF must build a portfolio with similar positions. Therefore, an issuer of a Dow Jones ETF needs to buy the thirty stocks.

History of the Dow Jones

The idea for the Dow Jones came from reporter Charles Dow in 1896. He is also the individual where the index gets its namesake from. Along with two other reporters, they owned Dow Jones & Company, which provided financial news to a broad audience. They had previously founded The Wall Street Journal in 1889. After the passing of Charles Dow in 1902, the company was bought by Clarence Barron and Jessie Waldron. The control then passed onto the Bancroft Family, who sold it to News Corp. in 2007. Nowadays, the Dow Jones index is owned by S&P Dow Jones Indices, which is itself a part of S&P Global. The company oversees numerous other stock indices, including the S&P 500, another influential indexes on the American market. The initial value of the Dow Jones Industrial Average was 40.94. During the major crisis in the late 1920s, the index dropped nearly 90% over a few years. In the late 20th century, the index surpassed the 10,000-point mark for the first time. It has since crossed the 30,000-point threshold.

Investing in ETFs with DEGIRO

To invest in ETFs, you need a broker to place an order. On our platform, you can invest in many ETFs. We also offer a Core Selection of ETFs you can invest in with reduced fees. Please note that the Core Selection is subject to change and falls under a Fair Use Policy. Currency, external product and spread costs may apply.

The information in this article is not written for advisory purposes and does not aim to recommend investments. Please note that the data may have changed since the writing of this article. Investing involves risks, and you may lose all or a portion of your investment. We recommend investing only in financial instruments that align with your knowledge and experience.

Sources: News Corp, S&P Global, The Wall Street Journal