Dow becomes more relevant
The composition of the world's most famous index, the Dow Jones Industrial, has been changed making it a more relevant benchmark.
Monday, November 1st 1999, 12:00AM
The composition of the world's most famous index, the Dow Jones Industrial, has been changed making it a more relevant benchmark.
Many money managers consider the Dow an irrelevant index because it is not representative of the make up of the United States economy, and it is price weighted, as opposed to market capitalisation weighted. That means the companies with the highest stock price have the largest effect on index movements.
"It's an irrelevant index," one manager says, however it is the index many media and investors focus on.
This week Microsoft, Intel, Home Depot and SBC Communications were added into the index recognising the ascendance of computers in the US market.
The four old companies they replaced are, Union Carbide, Chevron Corp, Goodyear Tire and Rubber and retailer Sears Roebuck.
Technology stocks account for about 24 per cent of the S&P 500, compared to 11.8 per cent of the Dow. The technology component in the Dow jumps to 19.6 per cent now Microsoft and Intel join IBM, Hewlett-Packard and Eastman Kodak in the index.
Microsoft, the biggest US company by value and Intel the third biggest will be the first Nasdaq listed companies to join the 103 year old Dow.
While the Dow is widely quoted as a barometer of market performance, the Standards and Poor's 500 is the index managers use to track the US market. In the US there is about US$700 billion tied up in index funds which track the S&P 500 and only US$165 million in funds which mimic the Dow.
The index is rarely changed. The last revision was in March 1997.
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