The Dow Jones Industrial Average (DJIA) is among the many tools that investors can use to understand general market movements. This index is one of the oldest and most frequently used indexes in the U.S. Learn how the Dow Jones works, how it compares to other top market indexes, and how you can invest to try to achieve its returns.
Dow Jones Industrial Average Definition
The Dow Jones Industrial Average is an index of 30 blue-chip stocks, which are defined as stocks from well-known, established companies with a strong performance history. This index includes of some of the largest U.S. companies in various industries that trade on the New York Stock Exchange (NYSE) and the Nasdaq. Investors and analysts use the Dow Jones as one way to gauge broader stock market trends.
How the Dow Jones Industrial Average Works
The Dow Jones, or Dow 30, was launched in 1896 by Charles Dow, co-founder of Dow Jones & Company, and is now owned by the S&P Dow Jones Indices.1
As a price-weighted index, the Dow Jones weights companies in proportion to their share prices. Stocks with higher prices have a greater fraction of the index than stocks with lower prices. Other equity indexes, like the S&P 500, are capitalization-weighted, meaning the stocks are weighted based on the size of the company’s market cap, which is the value of its outstanding shares.
The Dow Jones includes companies from all industries except transportation and utilities, so it’s often used as a gauge for overall market trends. Components of the Dow Jones can change, but they always include larger, well-established companies.2
Dow Jones vs. Nasdaq vs. S&P 500
The Dow Jones, the Nasdaq Composite Index, and the S&P 500 are all common benchmarks for general market trends, but they do have differences in their components.
The Dow Jones and the S&P 500, both owned by the S&P Dow Jones Indices, track large-cap U.S. companies. However, the Dow Jones has 30 companies, whereas the S&P 500 (as its name implies) has 500. The S&P 500 covers all major U.S. sectors and about 80% of the total market cap of U.S. publicly traded companies. The performances of the Dow and the S&P are highly correlated as they respond similarly to the same market influences.
Are Dow Jones companies in the S&P 500? The S&P 500 usually does include all the companies in the Dow, and those companies typically comprise about 25% to 30% of the S&P 500’s value. Changes to the companies in the S&P 500 may be made in response to market conditions or corporate developments, but changes to the Dow are rare, generally requiring a major corporate change or action, such as an acquisition.3,4
The Nasdaq Composite Index, or the Nasdaq, includes more than 2,500 companies listed on the Nasdaq stock market. It is weighted toward the information technology sector, although it includes companies in many sectors. Like the S&P 500, the Nasdaq is capitalization weighted.5
How to Invest to Track the Dow Jones
You can’t invest directly in an index, but there are several indirect ways you can invest to track the returns of the Dow Jones. One simple method is to invest in a mutual fund or an exchange-traded fund (ETF) that tracks it.
A mutual fund is a basket of securities purchased with pooled investments. An ETF is similar, except shares are traded over an exchange just like stocks. Mutual funds and ETFs can invest in securities in a way that aims to replicate a particular index like the Dow Jones. The fund may purchase all of the securities in the index, or a sample of those securities, to try to replicate the performance of the index.6
Another way to invest to track the Dow Jones is to purchase stocks of each of the 30 companies. However, purchasing the stocks individually instead of through an index fund is significantly more time-consuming and will likely entail more fees and expenses.
When investing in a mutual fund or an ETF, you should factor in any fees and expenses that could reduce returns and fully understand the risks, including the risk that the fund may underperform the index.
The Bottom Line
The Dow Jones Industrial Average can be a valuable tool to gauge broader market movements. You can use the Dow in tandem with other market indexes like the S&P 500 or the Nasdaq to help you make investing decisions, but keep in mind that there are no guarantees for how the market will perform.
Get Help from a Professional Financial Advisor
A financial advisor can help you determine which investment strategies best fit your current needs and future goals. We can help match you with a financial advisor who will put your needs first.
Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.
Mutual funds and exchange-traded funds are sold only by prospectus. Investors should consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained directly from the company or from your financial professional. The prospectus should be read carefully before investing or sending money.
1 Library of Congress, “Dow Jones Industrial Average First Published.” https://guides.loc.gov/this-month-in-business-history/may/djia-first-published
2 S&P Dow Jones Indices, “Dow Jones Industrial Average.” https://www.spglobal.com/spdji/en/indices/equity/dow-jones-industrial-average/#overview
3 S&P Dow Jones Indices, “Icons: The S&P 500 and the Dow.” https://www.spglobal.com/spdji/en/research-insights/index-literacy/the-sp-500-and-the-dow/
4 S&P Dow Jones Indices, “S&P 500.” https://www.spglobal.com/spdji/en/indices/equity/sp-500/#overview
5 Nasdaq, “Nasdaq Composite Comp.”
https://indexes.nasdaqomx.com/Index/Overview/COMP
6 Investor.gov, “Index Funds.” https://www.investor.gov/introduction-investing/investing-basics/investment-products/mutual-funds-and-exchange-traded-4
