Tags: Sloan | Dow | Apple | S&P 500

WaPo's Sloan: The Dow Is Irrelevant, But Everyone Watches It

By    |   Tuesday, 17 March 2015 01:30 PM

Everyone thinks of the Dow Jones Industrial Average when they think of the stock market, but it's not really a very popular or useful investment, according to Washington Post financial columnist Allan Sloan.
 
Sloan said that while everyone is aware of the benchmark Dow average, almost no one invests in mutual funds or exchange-traded funds tied to it.
 
The popular mindshare of the Dow will be on display this week when the Dow adds Apple to its list of 30 stocks, ousting AT&T. In addition, the Dow's highest priced component, Visa, will split its stock 4-for-1. The moves, which will occur on Wednesday evening in time for the Thursday market open, should cause "contortions" in the stock market, he predicted.
 
But the absence of real market impact by the Dow is reflected in the fact it is an average rather than an index like the bellwether S&P 500. The average is computed by adding up the prices of the 30 stocks and dividing the total Dow Divisor, which accounts for stock splits and changes in the list of companies.
 
"If GE rises a buck and Travelers falls a buck, the S&P, which measures stock market value, would show a $9.7 billion gain," Sloan said, referencing the fact GE has a much bigger market cap than Travelers does. "The Dow, by contrast, would be flat," he noted.
 
"This bizarre situation helps explain why, although everyone knows the Dow, almost no one invests in mutual funds or exchange-traded funds tied to it. The nation's biggest fund operator, Vanguard, says its investors have about $400 billion tied to the S&P, but not a penny tied to the Dow."
 
Sloan said the fact the Dow is merely an average, or proxy, for large-cap stocks makes it easy for non-Wall Streeters to understand.
 
"The simplicity of the Dow is one of its greatest attributes," said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
 
Sloan agreed. "Which is why people will be making such a fuss about the new i-Dow over the next few days. Even though it's totally insignificant," he concluded.
 
David Blitzer, chairman of the index committee at S&P Dow Jones Indices, the unit of McGraw Hill Financial that owns the Dow, said the addition of Apple helps keep the Dow current.
 
"The market changes, the economy shifts and the Dow changes as well. Only one company, GE, of the current 30 is an original member from 1896, and it is very different today from what it was 119 years ago. Adding Apple to the Dow is another change in a long list off entries and exits that keep the DJIA representative of current blue chips," he wrote on his firm's website.
 
"One thing that Apple isn't likely to get by joining the Dow is a pop in its stock," Blitzer predicted. In recent years some stocks joining the S&P 500 experienced a temporary gain of 3 percent to 6 percent, which was given back over the next few months."
 
Simon Moore, chief investment officer at FutureAdvisor, compared the Dow to the Wright Brothers' flying machine — it was an historic breakthrough when it was invented, but has long since been displaced by more modern aircraft.
 
In an article for Forbes, Moore asserted the Dow "now appears outdated, and doesn't merit its place alongside other more modern and better constructed investing benchmarks."

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Everyone thinks of the Dow Jones Industrial Average when they think of the stock market, but it's not really a very popular or useful investment, according to Washington Post financial columnist Allan Sloan.
Sloan, Dow, Apple, S&P 500
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2015-30-17
Tuesday, 17 March 2015 01:30 PM
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