Dow vs. S&P:  Why the Dow is Lagging

Weighing in on the Dow:

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 )?

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 and Citigroup ) vs. the S&P 500:

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 and tech giant Cisco Systems 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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