The Misweightings of the Dow
Below is a listing of the 30 stocks in the Dow Jones Industrial Average ($DJIA). The Dow is a price-weighted index which means that it’s calculated by adding up all the prices of the 30 stocks and dividing by an index divisor. The divisor is currently 0.132129493.
Price-weighting is a really bad idea and it’s a holdover from the days before computers. The S&P 500 is based on each stock’s market value which is a far more accurate measure.
Because of the Dow’s price-weighting, you get some screwy results, and that’s only gotten worse lately. For example, the entirety of Bank of America ($BAC) is now worth just 51 Dow points. The stock’s depressed share price means that it has the smallest weighting in the index. In fact, it’s twice as smallest as the second-smallest.
I’ve listed each stock in the index along with today’s closing price, the stock’s weighting in the Dow, the market cap, the weighting if the Dow were market cap-weighted and lastly, the discrepancy. In other words, Alcoa has 2.15 times the weighting in the Dow that it should have. We can see that Travelers ($TRV) has three times the weighting in the Dow as General Electric ($GE) even though GE’s market cap is more than seven times TRV’s.
Stock | Price | Weighting | Mkt Cap | Weighting | Difference |
Alcoa | $11.60 | 0.82% | $12.34 | 0.38% | 2.15 |
American Express | $42.80 | 3.02% | $51.09 | 1.58% | 1.92 |
Boeing | $57.41 | 4.05% | $42.55 | 1.31% | 3.09 |
Bank Of America | $6.77 | 0.48% | $68.61 | 2.12% | 0.23 |
Caterpillar | $83.51 | 5.90% | $53.95 | 1.67% | 3.54 |
Cisco | $13.73 | 0.97% | $75.52 | 2.33% | 0.42 |
Chevron | $90.57 | 6.39% | $181.41 | 5.60% | 1.14 |
DuPont | $44.83 | 3.17% | $41.74 | 1.29% | 2.46 |
Disney | $31.54 | 2.23% | $59.62 | 1.84% | 1.21 |
General Electric | $15.09 | 1.07% | $159.96 | 4.94% | 0.22 |
Home Depot | $28.51 | 2.01% | $45.39 | 1.40% | 1.44 |
Hewlett-Packard | $29.86 | 2.11% | $61.93 | 1.91% | 1.10 |
IBM | $162.54 | 11.48% | $194.12 | 5.99% | 1.92 |
Intel | $19.93 | 1.41% | $105.51 | 3.26% | 0.43 |
Johnson & Johnson | $60.20 | 4.25% | $165.02 | 5.09% | 0.83 |
JPMorgan Chase | $34.37 | 2.43% | $136.05 | 4.20% | 0.58 |
Kraft Foods | $32.80 | 2.32% | $57.93 | 1.79% | 1.29 |
Coke | $63.96 | 4.52% | $146.86 | 4.53% | 1.00 |
McDonald’s | $84.08 | 5.94% | $86.75 | 2.68% | 2.22 |
3M | $78.23 | 5.52% | $55.51 | 1.71% | 3.22 |
Merck | $29.81 | 2.10% | $92.01 | 2.84% | 0.74 |
Microsoft | $24.20 | 1.71% | $202.75 | 6.26% | 0.27 |
Pfizer | $17.05 | 1.20% | $134.71 | 4.16% | 0.29 |
Procter & Gamble | $58.51 | 4.13% | $166.89 | 5.15% | 0.80 |
AT&T | $27.88 | 1.97% | $165.22 | 5.10% | 0.39 |
Travelers | $49.04 | 3.46% | $20.53 | 0.63% | 5.46 |
United Technologies | $67.44 | 4.76% | $61.28 | 1.89% | 2.52 |
Verizon | $33.66 | 2.38% | $95.28 | 2.94% | 0.81 |
Walmart | $48.41 | 3.42% | $168.11 | 5.19% | 0.66 |
Exxon Mobil | $68.03 | 4.80% | $330.77 | 10.21% | 0.47 |
Posted by Eddy Elfenbein on August 10th, 2011 at 8:12 pm
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
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