The Dow Jones Industrial Average is an iconic index. It’s also a very dumb and outdated one.
The absurdity of the Dow was highlighted last week by the impact of Apple’s stock split on the index. Apple’s 4:1 split means its shares now trade at around $125, compared to $500 previously.
Although its market capitalisation is unchanged the split has had a huge effect on the Dow. Until last week Apple accounted for 12 per cent of the index, but that has now fallen to just 3 per cent. That's because the Dow is weighted by price not by market capitalisation.
As a result the high-priced UnitedHealth Group is now the Dow's most important constituent; it has twice as much influence on the Dow's movements as Apple even though Apple is seven times as valuable.
Does this make sense? No.
Investors should focus on a capitalisation-weighted index like the S&P 500 and see the Dow for what it is – a quaint investing relic.
