The Dow's losses on Tuesday look much bigger when compared with the S&P 500, but investors shouldn't be alarmed. It's mainly because of how the Dow Jones industrial average weights stocks, UBS' Art Cashin told CNBC on Tuesday.
Calling the Dow "somewhat overleveraged," Cashin said recent changes in the index make it easy for a few stocks to swing the average into negative or positive territory. The Dow shook up its lineup last fall, adding Goldman Sachs, Nike and Visa to the index. Cashin highlighted Johnson & Johnson and IBM as the two stocks affecting the Dow on Tuesday.
"If you live by the component, you die by the component," Cashin said on "Squawk on the Street." "We've got a handful of Dow stocks—mostly multinationals—that got hit a little bit after 11 a.m. And the viewers have to remember the Dow is weighted far differently than all the others."
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While other major indexes use market capitalization to weight stocks, the Dow uses price, and that translates to big drops if a few select companies underperform, Cashin said.
"If you put very high-priced stocks in, it's very easy for a stock that sells at $120 to drop 3 points, and whereas a stock trading at $30, that's not going to happen." Cashin said