The Dow Jones Industrial Average (DJIA) index measures the performance of the US economy by tracking the performance of 30 high-value stocks listed on stock exchanges across America. Also known as the Dow, the DJIA index is one of the most widely used indices in the world, however many feel that its narrow focus makes it less reliable as an indicator of the American economy than the S&P 500 index.
This page will take you through a quick history of the DJIA index, let you know how the stocks it tracks are chosen, and give you information about how you can invest in it.
The DJIA index’s history stretches all the way back to the late 19th century, when Charles Dow composed his first stock average in 1884. This original index was mostly composed of railroad companies and still survives today as the Dow Jones Transportation Average. The DJIA itself came into existence in 1896, tracking 12 industrial stocks including General Electric and the Laclede Gas Company (today Spire Inc). After the removal of General Electric in 2018, none of the original stocks are still tracked by the DJIA index.
The Dow Jones Industrial Average has been a feature of the US economic landscape for more than a century, and has seen steep rises and falls triggered by major global events throughout that time. After seeing huge growth throughout the 1920s, the DJIA fell more than 90% in the ensuing Great Depression. Markets were volatile in those years and the Dow’s biggest one-day increase still stands on March 15th 1933 when the index rose by 15.34%.
Other major events in the history of the DJIA include its single largest one-day drop, which happened on the 19th October 1987 – commonly referred to as ‘Black Monday’ – when the index fell 22.61%, and the 1997 ‘mini-crash’ when the Dow fell by 7.18%. Despite such setbacks, the DJIA index recorded an annual compound return of 5.3% throughout the 20th century.
In more recent times, The DJIA was heavily impacted by both the attack on the World Trade Center on September 11th 2001, and the financial crash of 2007-08. The index posted strong recoveries from these events, but then again fell sharply when the coronavirus pandemic spread across the world.
The DJIA index tracks 30 of the most influential stocks listed on stock exchanges across the US, with the aim to pick 30 companies that best represent the American economy as a whole. This means that as companies change value and structure over time, the index will change composition. Today the DJIA index tracks the stock of such household names as McDonald’s, Boeing, and Intel. The ‘industrial’ in the index’s title is largely historic now, as there is no requirement for companies it tracks to be directly involved in industry.
Some experts criticise the DJIA for not achieving its ambition of accurately measuring the US economy as it is a price-weighted index that is more responsive to price movements of more valuable stocks. However, it has been a mainstay of the economic environment of the USA for more than a century and looks very set to stay that way.
When investing in the Dow Jones Industrial Average, the best method is to use an exchange-traded fund (ETF). ETFs are financial products designed to change value in proportion with a specific exchange, and they can also be traded on exchanges.
This offers more flexibility than other methods of investing in indices such as mutual funds or buying stocks in all the companies an index tracks, while still giving investors desirable levels of diversification.