The S&P 500 And DJIA: Divergent Paths To Similar Results

The S&P 500® and the Dow Jones Industrial Average® (DJIA) are two of the best-known and most used indices in the world. They are both designed to represent U.S. large-cap companies. As we detailed in a recent paper, the S&P 500 and DJIA have similar long-term risk/return profiles. As of April 30, 2021, the DJIA posted a slightly higher 30-year annualized return of 11.16%, relative to 10.60% for the S&P 500. In addition, the three-year rolling correlation between the index returns was high, averaging 0.95 from April 1993 to April 2021.

However, when we look under the hood, we can see that these iconic indices followed different paths to achieve similar results. The S&P 500 currently includes 505 constituent companies, whereas the DJIA only has 30. They also employ different weighting schemes. The S&P 500 is float market-capitalization-weighted. This means that the weight of each stock depends on the total size of the company, adjusted for shares that do not trade publicly. In contrast, the DJIA is price-weighted, so the stock weights are determined simply by their price.

Here we will highlight three key takeaways from the paper.

The Two Indices Have Experienced Cycles of Relative Performance

In Exhibit 1, we have charted the three-year annualized relative returns between the S&P 500 and the DJIA. During periods when the blue line is above zero, the S&P 500 had outperformed the DJIA over the preceding three years. During the period of the tech bubble burst from June 2000 to June 2003, the S&P 500 significantly underperformed the DJIA. Part of this underperformance was due to the S&P 500 having a higher weight in the Information Technology sector.

The Top 10 Holdings of the Two Indices Are Quite Different

An analyst who first reviewed the top 10 companies in the S&P 500 and DJIA would not guess that the indices have performed similarly over the long term. As shown in Exhibit 2, as of April 30, 2021, there were only two names in common in each list—Microsoft and Visa. In the paper, we walk through the details of how the weight of Microsoft is calculated for each index.

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