USA TODAY International Edition
Dow 20,000? Try S& P 2300
IS THE NUMBER TO WATCH
Dow 20,000 made big news last week. Wall Street’s mightiest milestone of them all caught the attention of investors on Main Street. Photos of Dow 20,000 hats went viral. Headlines blared, “Dow tops 20,000.”
Yet Wall Street pros, known as the “smart money,” were far more fixated on another financially important round number, although admittedly not as big: 2300. As in 2300 on the Standard & Poor’s 500 stock index.
S& P 2300 doesn’t quite have the pizzazz, wow factor or ring to it as DOW 20,000. But on Wall Street, where the big- money types buy and sell shares of American companies in bulk, the S& P 500 stock index is their LeBron James- like superstar.
Despite its brand- name appeal and 30 well- known components like Coca- Cola, McDonald’s and Apple, the Dow has a slew of shortcomings that make it a less important stock gauge than the S& P 500.
The Dow has too few stocks, the pros argue. It offers too little diversification compared with the 500- stock S& P 500. It doesn’t offer an accurate enough snapshot of the U. S. economy. And the way it is constructed makes it less reliable as a stock market indicator. The Dow is a price- weighted index, which means its up- and- down movements are more greatly influenced by stocks with higher stock prices. In contrast, the S& P 500 is weighted by market value, which means it is driven by companies based on size.
More than 120 years after its inception in 1896, the Dow’s a tad old- fashioned and behind the times, Wall Street pros say.
“The investing public focuses on the Dow as a historical artifact,” says Erik Davidson, chief investment officer at Wells Fargo Private Bank. “The Dow … is something of a figurehead index, much like the British monarchy.”
Today, the S& P 500 rules. And that’s why a record- high close above 2300 ( it briefly crossed that milestone intraday on Thursday) is more important than the headline- grabbing Dow 20,000.
“The S& P 500,” says Bill Hornbarger, chief investment strategist at Moneta Group, “has surpassed the Dow in terms of its importance. The simple reason is that it is broader and more repre- sentative of the domestic economy than the Dow is with just 30 stocks.”
The Dow, for example, has only six tech stocks, and mainly oldtech names like Microsoft, Intel and IBM, vs. more than five dozen tech stocks in the S& P 500. The Dow doesn’t have online- advertising giant Alphabet ( the parent of Google) or social media giant Facebook or online- retail power Amazon. com. Nor does the blue- chip Dow have any exposure to the utilities or real estate sectors, or exposure to small regional banks like Cincinnati- based Fifth Third Bank or oil servicesrelated firms like Schlumberger.
Currently, $ 2.1 trillion is invested in “passively managed” index mutual funds and exchanged traded funds that mimic the S& P 500, vs. only $ 35.6 billion that is invested in these types of funds that track the Dow, according to S& P Dow Jones Indices.
The S& P 500 — and not the Dow — is also the performance benchmark that money managers are compared against, adds Don Luskin, chief investment officer at TrendMacro. “A pro is only interested in what benchmark he is trying to beat,” says Luskin.
Adds Luskin: “Retail investors who still think about the Dow do so out of nostalgic habit. But investors who make up the vast majority of trading nowadays look at more sophisticated indexes that are better constructed and more diversified.”