The Ottumwa Courier

AP National

September 10, 2013

Why the Dow is getting a makeover

(Continued)

The economy has shifted away from heavy manufacturing in recent decades, and so has the index. More members come from finance and technology. After Alcoa leaves later this month, the "industrial" part of the Dow's name will only be 19 percent of the index itself.

At the same time, health care has become a bigger part of the economy, and that's reflected in the Dow. Companies such as UnitedHealth Group, Pfizer and Merck have joined the index. Financials have become a larger part, too.

Q: HOW DOES THIS IMPACT MY INVESTMENTS?

A: Simple answer: it doesn't. Very few investors actually structure their portfolios around the Dow. Most prefer to use the S&P 500, which is a far broader representation of the market than the Dow.

More funds and more money chase after the S&P 500 than any other U.S. stock index. Some 1,338 funds worth $3.087 trillion track the S&P, according to data from Morningstar. The Dow, by contrast, has six funds worth $195.5 million.

However, Wall Street traders and the media refer to the Dow because it's easier to understand than the S&P 500. When someone says "the Dow lost 200 points," it resonates better than "the S&P 500 lost 20 points."

And the Dow, despite its flaws and lack of funds attached to it, generally tracks the S&P 500 well over the long term. The Dow is up 35.1 percent over the last five years, while the S&P 500 is up 35.3 percent.

Q: WHY ARE BANK OF AMERICA, HEWLETT-PACKARD AND ALCOA BEING REMOVED?

A: Low stock prices are the primary reason for their removal, along with a need to better represent the makeup of the U.S. economy.

The Dow is a price-weighted average, which means that the higher the stock price, the more influence the stock has over the index's level. Bank of America, HP and Alcoa were the lowest-priced stocks in the Dow, so their movements did not impact the index as much as higher priced members like IBM and 3M.

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