At 125 years, the Dow is more relevant than some investors might think

Published Wed, May 26 20213:01 PM EDTUpdated Wed, May 26 20213:28 PM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

Nineteenth-century blue chips like U.S. Leather and American Cotton Oil are long gone, but the Dow Jones Industrial Average lives on, celebrating its 125 th year on Wednesday. Apple, Boeing , Intel and Honeywell are among the current Dow 30 , representing industries that didn't exist when the Dow was launched on May 26, 1896, with a dozen industrial stocks. Charles Dow, co-founder of Dow Jones Co., created the index as a complement to his 12-year old transportation index, made up of mostly railroad companies. "It's still probably the world's most well-known index and when someone says, 'How's the market doing?' and it's up 300 points, everyone knows it's the Dow, which is pretty amazing given how little is indexed to the Dow," Wharton School professor Jeremy Siegel said. The Dow has been rivaled by the broader S & P 500 , which was created in 1957. The blue-chip index is price-weighted, meaning the highest-priced stock could have the most impact on the index. Meanwhile, the S & P 500 is float-adjusted and market cap weighted. "The interesting thing about the Dow is that, despite its odd construction and price weighting — which is really unusual and odd — it basically beat the S & P 500 over the last 30 years," Siegel said. He said that from April 30, 1991 to April 30, 2021, the annualized total return on the Dow was 11.17%. That compares to the total return, which includes reinvested dividends, of 10.59% for the S & P 500. Siegel said those returns would surprise many investors who prefer the broader-based S & P 500. "Honestly they should drop the price weighting. It was never optimal, but it's become more and more outmoded as stocks don't split anymore," he said. "As a result you have these very high-priced stocks that can't be put in because they dominate the index." The Dow and S & P 500 track the same market trends and move relatively in tandem. The Dow is up about 12% year-to-date, and the S & P 500 is up 11.6%. "The proof is in the pudding that they've chosen well," Siegel said of the Dow 30 components. The index is now part of S & P Global's S & P Dow Jones Indices. The third major index, the Nasdaq Composite is much more influenced by technology stocks, and it is up just 6.6% so far for 2021. The Dow's last original stock, General Electric, was dropped from the average in 2018. Its current members are from a range of industries. Retail is represented by Home Depot . Disney is the media and entertainment member, and Merck represents pharmaceuticals. The Dow's best day on record was March 15, 1933, when it gained 15.3%. The next two best performances were in 1931 and 1929, and its fourth-best day was March 24, 2020, when it gained 11.4%. By 1928, the Dow had broadened out, and it was up to 30 members. Among those original components were U.S. Rubber, which became part of Uniroyal, now Michelin. There was also American Tobacco, broken up in a 1911 antitrust action. American Sugar evolved into Amstar Holdings. Tennessee Coal, Iron and Railroad Company became part of U.S. Steel in 1907. At the index's inception, the industrial companies were the growth companies, much as technology is today. There was prestige for the companies selected to the index, especially if their stock symbol was a single letter, like "Z" for Woolworth or "C" for Chrysler, said Art Cashin, director of floor operations for UBS at the New York Stock Exchange. The Dow has gone through many iterations with stocks coming and going, and industries gaining and losing share of the representation. "America has changed so much," Cashin said. "It's been a long evolution. It's not what Mr. Dow imagined."

The Wall St. sign is seen near the New York Stock Exchange (NYSE) in New York City, May 4, 2021.

Brendan McDermid | Reuters

Nineteenth-century blue chips like U.S. Leather and American Cotton Oil are long gone, but the Dow Jones Industrial Average lives on, celebrating its 125^th year on Wednesday.

Apple, Boeing, Intel and Honeywell are among the current Dow 30, representing industries that didn't exist when the Dow was launched on May 26, 1896, with a dozen industrial stocks. Charles Dow, co-founder of Dow Jones Co., created the index as a complement to his 12-year old transportation index, made up of mostly railroad companies.

"It's still probably the world's most well-known index and when someone says, 'How's the market doing?' and it's up 300 points, everyone knows it's the Dow, which is pretty amazing given how little is indexed to the Dow," Wharton School professor Jeremy Siegel said.