Investing
Better than the Dow
What is still the most-quoted market indicator in newspapers, on TV and on the Internet - the Dow Jones Industrial Index (DJIA) which has recently made it past its January 2000 high.
Let?s look briefly at the history of this index, why it may be out of date and discuss some better ETF options than the Dow Diamonds (DIA) to tap into the mega-cap trend.
Charles Dow created in 1896 the first Dow Jones Index that included nine railroad stocks, a steamship line and a communications company. In 1916, the industrial average expanded to 20 stocks; the number was raised again, in 1928, to 30, where it remains.
Charles Dow had the vision to create a benchmark that would project general market conditions and therefore help investors bewildered by fractional dollar changes. A revolutionary idea at the time, its implementation was simple. The averages were, well, plain old averages. To calculate the first average, Dow added up the stock prices and divided by eleven, the number of stocks included in the index. A special divisor other than the number of stocks is used to avoid distortions when constituent companies split their shares or when one stock is substituted for another.
Today, the DJIA is a benchmark that tracks American stocks that are considered to be the leaders of the economy and are listed on the Nasdaq and NYSE. The DJIA covers 30 large-cap companies, which are subjectively picked by the editors of the Wall Street Journal. Over the years, companies in the index have been changed to ensure the index stays current in its measure of the U.S. economy. In fact, of the initial companies included, only General Electric remains as part of the modern-day average.
The most recent deletions were when Kodak, International Paper, and AT&T were replaced by Pfizer, AIG, and Verizon. A few years ago, the Dow's overseers made history by adding the first two stocks listed not on the New York Stock Exchange, but on the Nasdaq: Microsoft and Intel. Since 1959, other companies added include Disney, Wal-Mart, McDonald's, and Home Depot.
You may be thinking that the S&P 500 Index has overtaken the DJIA in popularity. But over long stretches, the Dow 30 and the S&P 500 have correlated closely. The S&P 500 Index is also market-cap weighted leading to an unhealthy concentration in the largest stocks. This index is 12% off its 2000 peak.
As the Dow Average breaks 2000 highs it is important to note that only ten of the thirty companies have actually accomplished this feat. Since January 2000, Altria is up 200%, Caterpillar about 150% followed by companies like Boeing and Exxon-Mobil. Twenty companies such as JP Morgan Chase, HP, IBM, Intel and Disney are still below 2000 levels. In addition, if we adjust the Dow Average for inflation, its real peak is 14,100.
I suggest that investors will be better off trading their Diamonds for the Rydex Mega 50 ETF (XLG) which tracks an index of the largest fifty U.S. stocks. Another good pick would be (SDY) whose basket includes the 50 highest yielding stocks in the S&P 1500. If you think the Dow is overbought you might consider the new Pro Funds ETF that moves inversely to the Dow and trades under the apt symbol (DOG).
Because the DJIA is made up of exclusively U.S. companies and by definition focused on industrial companies, it does not accurately reflect the performance of large swaths of the U.S. or global marketplace. There are a lot of good companies in the DJIA but it is no longer a good barometer of the American economy or the typical American portfolio nor a useful index for investment vehicles to track.
For example, since the trough in early 2003, the Dow is up 56% while the broadest measure on international stocks, the Dow Jones Wilshire Global Index is up 137% and countries like Japan and Germany are up over 100%. A great play for a global investor is the S&P Global 100 ETF (IOO) that includes exposure to 100 of the largest companies in the world. About 50% are American companies. Year to date, it is up 13% and has decisively beaten the Dow and the Diamonds.
What?s better out there? The Dow Jones Industrial Average was revolutionary at inception and has a well deserved storied past that parallels the evolution of the American economy. For the era of the global economy and investor, it?s time for a new revolution.
Carl T. Delfeld President & Publisher Chartwell Partners http://www.chartwelladvisor.com Carl has over twenty years of experience in the global investment business with a strong background in Asia. ? Author of global investor primer "The New Global Investor" ? President of the global investment advisory firm Chartwell Partners ? Publisher of the Chartwell Advisor ETF Report and Asia-Pacific Growth ? Columnist on global investing with Forbes Asia: "Global Gambits" ? Former U.S. Representative to the Executive Board of Asian Development Bank ? Chairman of the global economic strategy think tank ChartwellAmerica ? Asian specialist with the U.S. Joint Economic Committee and the U.S. Treasury ? Former member of the U.S. Asia Pacific Economic Cooperation Committee ? Former investment executive with Robert Baird & Company and UBS ? Graduate of the Fletcher School of Law & Diplomacy with economics scholarship from U.S.-Japan Friendship Commission |
Carl Delfeld
Tags: etfs, ishares, exchange-traded funds, global investing, delfeld, chartwell advisorSimilar articles
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