Why the Dow isn’t the best index to measure your portfolio against
The Dow Jones Industrial Average, considered one of the major barometers of U.S. stock market performance, rose above 50,000 points on Thursday. The index rose by 0.6% in early trading following positive earnings results from index constituent Cisco and the start of a key diplomatic meeting between the U.S. and China.
But if you’re an everyday investor, the Dow hitting 50,000 points likely doesn’t mean much, says Todd Rosenbluth, head of research at investment research firm TMX VettaFi.
For one thing, the market makes new highs and achieves new “points” milestones all the time. The Dow hit 40,000 points in May 2024 under former President Joe Biden. The U.S. market historically moves upward, with each new plateau becoming easier and easier to reach. Over the past 20 years, the Dow has averaged a 7.8% annual gain. At that pace, it’s set to eclipse 70,000 by 2030 and 100,000 by 2035, according to a February analysis from investment firm Raymond James.
For most investors, points in the Dow are far less useful to think about than percentage changes in their investments, which are far more likely to be tied to more modern indexes, such as the S&P 500, Rosenbluth says.
“Every time the market moves higher, it’s a good thing, but round numbers are just nice to look at,” he says. “What’s more important is, did the money that you invested, go up by the percentage that you hoped it would for your financial goals?”
The Dow first reached the 50,000-point mark in February, and the index’s performance quickly became a talking point for President Donald Trump and his administration.
On Feb. 11, former Attorney General Pam Bondi cited the milestone during a House Judiciary Committee hearing, sidestepping questions about the handling of the Jeffrey Epstein files to chastise Democrats for ignoring stock market gains. Two weeks later, though the index had since fallen, Trump claimed during his State of the Union address that the index had broken 50,000 primarily due to his administration’s tariff policies.
Some experts argue that markets up are up despite Trump’s tariffs, not because of them. But Trump said in his speech that the Dow’s nice, round milestone is a clear sign to the administrations that the economy is “roaring like never before.”
Why experts say many investors can ignore the Dow
Before you look at the Dow eclipsing 50,000 as an unprecedented success for “the market,” take a look at what broad stock market investments you actually own, experts say.
If you hold a mutual fund or exchange-traded fund that tracks the broad stock market, chances are, it doesn’t track the Dow. Among retail investors, the far more popular broad U.S. stock market benchmark is the S&P 500. The three largest ETFs on the market each directly track the S&P and hold portfolios worth between $700 billion and $900 billion, according to ETF data site ETFdb.com. The largest fund that tracks the Dow holds about $44 billion in assets.
The reason lies in how the indexes are constructed. Debuting in 1896, the Dow is the nation’s oldest index and holds a portfolio of only 30 stocks overseen by three representatives from S&P Dow Jones Indices and two representatives from the Wall Street Journal. The committee selects stocks on subjective criteria, such as company reputation and interest in the company among investors.
As a result, the Dow tends to comprise of well-known, financially mature companies, says Zachary Evens, a manager research analyst at investment research firm Morningstar.
“The committee seeks to capture the 30 most significant companies to the U.S. economy. Those are ‘blue chip’ names like Caterpillar and Microsoft and Home Depot and Visa and McDonald’s,” he says.
Stocks in the Dow are weighted by price, which means the highest-priced stocks, rather than the largest companies, get the biggest slots in the portfolio. The two top spots in the Dow currently belong to Goldman Sachs and Caterpillar.
The S&P 500 takes a more quantitative approach, including, roughly, the 500 largest U.S.-traded companies weighted by market capitalization, which can be found by multiplying a stock’s share price by the number of shares outstanding.
“The S&P 500 is a more accurate barometer of the U.S. market than the Dow is because it captures more of the market and it is market cap-weighted,” says Evens. “And since market cap is a better reflection of actual company size [than share price], it does a better job of capturing not just more of the market but more accurately, the complexion of the U.S. stock market.”
The S&P tracks more companies than the Dow and assigns them weightings by how big they actually are, not what their stock costs, Evens says. That’s made the S&P a more popular benchmark for professional investors, and lately, a more lucrative holding for retail investors. Missing among the Dow’s holdings are Nvidia, Alphabet, Amazon.com and Alphabet — some of the largest holdings in the S&P that have driven performance of the index over the past several years.
The Dow still has its fans. The largest Dow-focused ETF has a loyal following and that funds that track other versions of the index — such as one which holds the stocks in equal weight and one which prioritizes higher dividend payers — may be appropriate for investors interested in high-quality firms or equity income, Rosenbluth says.
But over the past 15 years, an investor in the S&P would have earned an annualized return of 14.1%, compared with a 11.9% return in the Dow.
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