Why the S&P 500 and Dow Industrials Differ So Much—and How to Tweak the Dow to Your Liking

The most recent official numbers from S&P Dow Jones Indices showed $7.1 trillion indexed to the S&P at year-end 2021 and just under $40 billion indexed to the Dow. An unofficial estimate based on subsequent market moves puts that at about $6.3 trillion indexed to the S&P and about $37 billion indexed to the Dow.

Why is 170 times as much money tied to the S&P 500 as to the Dow? We’ll look at some numbers that will tell us why.

Along the way, we’ll discuss the Dow divisor, which is used to adjust the Dow whenever one of its 30 components does a stock split or a spinoff, or when new companies are added to the Dow and old ones get tossed out.

As a bonus, I’ll show you how to create your own Dow by tweaking the divisor.

Here we go.

The Dow is an average based on the total share prices of its 30 components. By contrast, the S&P 500 is an index based on the market values of its 500 companies.

When the Dow was created in 1885, before computers, the internet, and instantaneous communications, the only way to calculate a market indicator was to add up its components’ share prices and divide by the number of components. So that’s what Charles Dow did.

However, by 1956, when the S&P 500 was launched, technology had advanced to the point that S&P could base its new market metric on companies’ total stock market values rather than on their share prices.

That’s why the S&P 500 is a much better, much broader market indicator than the Dow. That, in turn, is why there’s tons of money in S&P 500 index funds and only a relative pittance in Dow funds.

For a classic example of why the S&P 500 is a much more popular investment vehicle than the Dow, let’s look at two of the 30 Dow stocks:
Apple
(ticker: AAPL) and
UnitedHealth Group
(UNH).

Apple, our country’s most valuable stock, has a market value more than five times UnitedHealth’s. But in the Dow, UnitedHealth’s weight is almost three times Apple’s.

That’s because UnitedHealth’s share price (as of May 5, the date used for most of the numbers in this article) was $494.28 and Apple’s was $173.57. As a result, UnitedHealth’s weight in the Dow was 9.67% to Apple’s 3.40%, according to Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices.

However, when it comes to the S&P 500, according to numbers that I got from Silverblatt, Apple (No. 1 in market value) has more than five times the influence of UnitedHealth (No. 10): 7.47% to 1.34%.

I asked Apple and UnitedHealth what they think about their spots on the Dow. Apple declined to weigh in. UnitedHealth didn’t get back to me.

Now, let me show you how to tinker with the Dow divisor, so that if you like, you can create your own Dow.

Let’s say that the management of UnitedHealth decided its stock would be more attractive to investors at about $250 rather than its current price of almost $500 and decided to split the stock 2-for-1.

The split would have no impact on the S&P 500, because UnitedHealth’s market value would be unchanged. But its weight in the Dow, according to Silverblatt, would drop to 5.06% from 9.67%. Meanwhile, the weight of the 29 other Dow components would rise to offset UnitedHealth’s decline.

Nothing financial will have changed, but the influence of individual stocks—and the Dow’s future numbers—will have been modified.

Now, to the Dow divisor. Dow Jones, which owns Barron’s, spun off its index business in 2010. It is now owned by S&P. When the Dow was created 138 years ago, it was calculated by taking the sum of its then-12 components and dividing by 12. But as time went on, the folks in charge adjusted their math to keep the Dow on an even keel through stock splits, spinoffs, and changes in components.

That’s done by using the Dow divisor, which is currently a wonderfully precise 0.15172752595384. Each $1 move in any Dow component moves the Dow by 1 divided by the divisor: roughly 6.59 points.

If UnitedHealth were to split 2-for-1, the divisor would have to change to keep the post-split Dow consistent with the current Dow.

You can use the methodology below to create your own Dow. Have UnitedHealth split 3-for-1 rather than my hypothetical 2-for-1. Add whatever stocks you like to the Dow, toss out the current Dow components that you’d like to lose, calculate the new Dow divisor, and go on from there.

To be sure, going through this exercise won’t increase the value of your investment portfolio. But it makes you think, it can be fun, and it doesn’t cost you any money. These days, that’s a pretty good deal.

Do Your Own Dow

Here is how I calculated what the new divisor would be if UnitedHealth had split 2-for-1 following the market’s May 1 close. (I may be off a tiny bit because my calculator can handle only 10 digits and the divisor has 14, but you’ll get the idea.)

• Divide 1 by the divisor, and you see that each $1 change in any component moves the Dow by 6.590761959 points.
• The Dow closed at 34,051.70 on May 1. Divide that by the divisor, and you get a total price of $5166.58 for the 30 Dow components.
• UnitedHealth closed at $495.70 on May 1. If it had split 2-for-1 after the close, its stock would have been $247.85. The total value of all 30 components would thus have been $247.85 less, or $4918.73.
• Divide $4918.73 by the Dow’s May 1 close of 34,051.70, and you get a Dow divisor of (approximately) 0.144448882.
• Therefore, each $1 move in any Dow component would be about 6.922864242 points had UnitedHealth split, as opposed to the current 6.590761959 points.

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