The Dow Jones Industrial Average also referred to as The Dow that was introduced in May 1896 is a price-weighted measure of 30 U.S. blue-chip companies. The index covers all industries with the exception of transportation and utilities, which are covered by the Dow Jones Transportation Average and Dow Jones Utility Average. Stock selection is not governed by quantitative rules and typically a stock is added to the index only if the company has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors. Maintaining adequate sector representation within the indices is also a consideration in the selection process.
The index universe is defined as all U.S – listed stocks of companies that produce non-transportation and non-utility goods and services. The definition of industrial is kept intentionally broad to provide an indicator that reflects the performance of the entire U.S. economy.
The index is unique in that it is price weighted and its constituent weightings are affected only by changes in the stocks’ prices. The indices are calculated by means of the divisor methodology used in all S&P Dow Jones Indices’. The index values are calculated by simply adding up the constituent stock prices and dividing by the number of constituents. The divisor is adjusted to smooth out the effects of stock splits and other composition changes. The base value of the index is 40.94 as on 26th June 1896.
Unlike most other indices that are reconstituted according to a fixed review schedule, constituents of these indices are reviewed on an as-needed basis. For the sake of continuity, composition changes are rare, and typically occur following corporate acquisitions or other significant changes in a constituent company’s core business. When an event necessitates that one constituent be replaced, the entire index is reviewed and several constituent changes are implemented simultaneously.
Financials constitute 19.31% followed by Technology at 15.89%, Healthcare at 14.5%, Consumer Services at 14.17%, Industrials at 12.33%, Consumer Goods at 9.64%, Oil and Gas at 6.52%, Utilities at 2.9%, Basic Materials at 2.64% and Telecommunications at 2.1% for the sector allocation in the index.
The Dow Jones Industrial Average has given a return of -2.86% on a year on year basis and -8% year to date in August 2015. The index reached an all-time high of 18,351 on 19th May 2015. The index has a Price to Earnings ratio of 14 in the current scenario. Apple Incorporation company has the highest weightage of 3.03% in the Dow index followed by Microsoft with a weightage of 1.64%, Exxon Mobil with 1.43%, Johnson and Johnson with 1.2%, Wells Cargo at 1.17% and General Electric at 1.14% while others have less than 1.135% weightage each in the index.