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Dow vs. S&P: Why the Dow is Lagging

Published: Tuesday, 2 Jun 2009 | 2:09 PM ET

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By: Robert Hum
Markets Producer

Weighing in on the Dow [.DJIA Loading... () ]:

The Dow Industrials briefly turned positive for the year earlier this morning. WAHOO! But wait…the S&P 500 turned positive for 2009 nearly one month ago and is now up over 4.5% this year.

So why the performance lag in the Dow (compared to the S&P [.SPX Loading... () ])?

1) Modest underweighting in the year’s standout sector (techs)

2) Heavy overweighting in the slightly underperforming industrials sector

Take a look at the sector breakdown of the current Dow (with GM [GMGMQ Loading... () ] and Citigroup [C Loading... () ]) vs. the S&P 500:

                                                                                 Difference
                   Current Dow      Current S&P      Btwn Current       % Chg of
                       Weighting          Weighting        Dow & S&P Wt    Sector YTD
Industrials       19.51%              10.32%           +9.19%            -1.06%
Cons. Stpls.     16.40%              11.94%           +4.46%            -1.59%
Telecom          4.92%                3.36%            +1.56%            -8.00%
Cons. Disc.      10.03%               9.09%            +0.94%          +12.12%
Materials          3.63%               3.39%             +0.24%           +21.62%
Energy           12.87%              13.20%             -0.33%            +5.48%
Techs            16.65%              17.91%             -1.26%           +23.22%
Utilities             0.00%               3.90%             -3.90%            -2.98%
Healthcare        8.96%               13.63%            -4.67%            -2.98%
Financials          7.03%               13.25%            -6.22%           -2.06%

Out with the Old, In with the New

As our Ariel Nelson analyzed earlier this morning, the addition of insurance firm Travelers [TRV Loading... () ] and tech giant Cisco Systems [CSCO Loading... () ] to the Dow Industrials will have a ripple effect on the weightings of the other 28 Dow components (see story here).

Upon closer examination of the Dow’s new sector weightings, the two additions will ultimately bring the Dow closer inline with the S&P 500’s current sector weightings.

Of the 10 major sectors, the Dow is currently underweight in 5 sectors. After the change, the gap in 2 of those underweighted sectors will narrow, with financials getting a big boost and techs getting a modest hike. Additionally, the Dow will reduce its weighting in each of the other 5 sectors in which it is overweight, with notable cuts in two of its current bigger sectors – industrials and consumer staples.

Here’s how the new sector weightings for the Dow will take shape after the inclusion of Travelers and Cisco Systems:

                                           New Dow           Change from
                                          Weighting           Current Dow
Financials                        10.00%              +2.97%
Techs                             17.52%              +0.87%
Utilities                             0.00%              +0.00%
Materials                           3.45%              -0.18%
Telecom                            4.68%              -0.24%
Healthcare                         8.51%              -0.44%
Consumer Discretionary        9.47%              -0.56%
Energy                            12.24%              -0.64%
Consumer Staples             15.59%               -0.81%
Industrials                       18.55%               -0.97%

Of course, only time will tell if these changes will in fact help the Dow better track the performance of the benchmark S&P 500 in the months ahead.

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