The Dow Jones, S&P 500 and NASDAQ are all indexes – they
track a collection of companies in the US that are believed to reflect the
overall performance of the entire economy.
An index is meant to provide a summary of the market by tracking a sample of top stocks, which attempts to provide an insight in how the overall market is performing. When you hear on the news “The stock market is up” or “The US economy is booming” they are usually referring one of these indexes.
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| Photo by Patrick Weissenberger on Unsplash |
A common critic of the Dow is that the way it is set up, one or two companies that are high priced could have a big influence on the stock price (such as Apple and UnitedHealth Group in March of 2020), to which the S&P 500 is often offered as a suitable alternative as it is market capped and so has less sensitivity to such exceptions.
Dow Jones
The Dow Jones Industrial Average (often simply referred to as “The Dow”) is collection of Americas 30 top companies. These 30 companies, which include household brands such as Coca-Cola and Johnson & Johnson, only represent around 25% of the total value of all of the companies listed on the New York Stock Exchange (NYSE).
Some of the industries that are represented in the index as of April 2021 along with their weightings include:
21.25% - Information Technology
17.55% - Industrials
17.05% - Health Care
15.42% - Financials
13.38% - Consumer Discretionary
7.40% - Consumer Staples
4.72% - Communication Services
1.98% - Energy
1.24% - Materials
The Dow Jones top 10 holdings as of April 2021 along with their weightings include:
7.52% - UnitedHealth Group Incorporated
6.59% - Goldman Sachs Group Inc.
6.31% - Home Depot Inc.
5.02% - Microsoft Corporation
4.92% - Amgen Inc.
4.77% - Boeing Company
4.49% - Caterpillar Inc.
4.48% - McDonald's Corporation
4.47% - Honeywell International Inc.
4.46% - salesforce.com inc.
S&P 500
Investing in an S&P 500 index fund is the recommendation of world famous investors Charlie Munger and Warren Buffett. Compared to the Dow, the S&P 500 is far more diversified and represents approximately 75% of all traded stocks.
The S&P is also weighted using a float adjusted market cap, which means only the value of the shares available on the market is calculated, which critics of the Dow Jones argue makes it a superior index.
Some of the industries that are represented in the index as of August 2020 along with their weightings include:
27.32% - Information Technology
12.84% - Health Care
12.69% - Consumer Discretionary
11.17% - Financials
10.92% - Communication Services
8.65% - Industrials
5.99% - Consumer Staples
2.68% - Materials
2.66% - Utilities
2.63% - Energy
2.45% - Real Estate
The S&P 500 top 10 holdings as of April 2021 along with their weightings include:
5.98% - Apple Inc.
5.55% - Microsoft Corporation
4.11% - Amazon.com Inc.
2.08% - Facebook Inc. Class A
1.94% - Alphabet Inc. Class A
1.87% - Alphabet Inc. Class C
1.60% - Tesla Inc
1.46% - Berkshire Hathaway Inc. Class B
1.32% - JPMorgan Chase & Co.
1.20% - Johnson & Johnson
NASDAQ
The NASDAQ market index (known as the NASDAQ composite) tracks approximately 3000 companies listed on its own stock exchange (the NASDAQ exchange). The NASDAQ composite should not be confused with the NASDAQ exchange, which is where the stocks are actually traded (similar to the NYSE).
The NASDAQ is unusual in the regards that it is an exchange that has its own widely used index – a reason for this popularity is that the NASDAQ has become shorthand for the tech-sector and high growth companies of all sizes.
Because of its bigger technology focus, the NASDAQ composite has seen exceptional performance, between April 2016 and April 2021, the Dow gained 89%, S&P 500 gained 99% and the NASDAQ gained 183%. What is more, the NASDAQ was less affected and recovered quicker after the 2008 financial crisis and the COVID correction of March 2020.
This article is not advice and has not been prepared in accordance with legal requirements designed to promote the independence of investment research – no recommendations are given in the buying, selling or holding of any investments. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss. Always seek professional advice.