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The Dow Jones Industrial Average (The Dow or DJIA) and the S&P 500 are quintessential market benchmarks. Both underlie a number of investment products, are published by S&P Dow Jones Indices, and track the stocks of large U.S. companies.
The Dow and the S&P 500 both have long
and distinguished histories.
Charles Dow began calculating his daily average of 12 major industrial stocks in May 1896 as a companion to the Dow Jones Transportation Average™, which he introduced in 1884. He used the two together to monitor broad market trends. Eight stocks were added in 1916, and 10 more in 1928, bringing the total to 30, where it remains today. In Dow’s view, the stock price average would serve as the market’s benchmark, a role it continues to play. But what has changed—along with the size and complexity of the market it tracks—is that The Dow is no longer limited to industrial stocks.
In 1923, in an effort to reflect market trends, the Standard Statistics Company developed its first stock index. This precursor of the S&P 500 tracked 233 U.S. stocks and was calculated weekly. In 1926, it was reformulated as the Composite Stock Index, which tracked 90 stocks and was calculated daily. Over time, the number of securities grew and the frequency of calculation increased until, in March 1957, the S&P 500 debuted in the format that persists today.
In terms of index construction, both The Dow and the S&P 500 track large-cap U.S. stocks. The Dow’s components are large and well-known companies that are often described as blue chips. The S&P 500 tracks top companies in leading industries in the large-cap segment of the market as well. All of the stocks in The Dow are typically included in the S&P 500, where they generally make up between 25% and 30% of its market value.
Since they were introduced, The Dow and the S&P 500 have included companies selected from the large-cap segment of the U.S. stock market.
For each index, the final decision about which stocks to add is made by an S&P Dow Jones Indices committee: the Averages Committee in the case of The Dow and the U.S. Index Committee in the case of the S&P 500.
While stock selection for The Dow is not governed by a strict set of rules, the committee focuses on an eligible company’s reputation, its history of sustained growth, its interest to investors, and its sector representation of the broader market. Over the past 15 years, for example, a number of technology companies have been added, reflecting the growth of the sector within the U.S. equity market.
However, there are no utilities or transportation companies in The Dow, as they are tracked separately in the Dow Jones Utility Average and the Dow Jones Transportation Average.
The selection process for the S&P 500 is governed by quantitative criteria—including financial viability, public float, adequate liquidity, and company type—that determine whether a security is eligible for inclusion. The committee’s role is to choose among those eligible stocks, taking sector representation into account. Among the key requirements are that a company has a sizeable enough market capitalization to qualify as a large-cap stock. It also must have sufficient float, or percentage of shares available for public trading. You can view the current thresholds for both of these criteria in the S&P 500 factsheet.
Both The Dow and the S&P 500 are reviewed periodically to ensure that their component stocks meet the selection criteria, but the catalyst for change can be different.
The Dow components are reviewed on an as-needed basis. To preserve continuity, changes are rare. Replacing a stock generally requires a significant change in a constituent company’s core business or a major corporate action, such as an acquisition.
Changes to the S&P 500 are generally made in response to corporate actions and market developments, and may be made at any time. The index’s methodology provides specific guidelines for deleting a company, for example, if its stock has been delisted or the company has declared bankruptcy. A replacement is then selected from the list of eligible securities.
A key difference between The Dow and the S&P 500 is the method used to weight the constituent stocks of each index.
The Dow is price-weighted. This means that price changes in the highest-priced stocks have greater impact on the index level than price changes in the lower-priced stocks. This methodology has meant, over the years, that extremely high-priced stocks have not been included in The Dow. The reason is that changes in the stocks’ prices could exert too great an influence on the index, making The Dow a less reliable measure of overall market performance.
The S&P 500 is a float-adjusted market-cap-weighted index. Float-adjusted market cap is a measure of company size that is calculated by multiplying a stock’s price by its number of shares outstanding, adjusted for public float. The larger a stock’s float-adjusted market cap, the greater the impact a change in that stock’s value will have on the index level.
Public float refers to the portion of a stock’s shares that are available for public trading. It excludes large blocks of non-trading shares, such as those held by the company’s founders or executives or by government agencies. These non-trading shares are excluded from the calculation of a float-adjusted market-cap-weighted index, with the intent of better representing the role of each constituent stock in the market.
Both The Dow and the S&P 500 are calculated by dividing a numerator by a divisor.
In the case of The Dow, the numerator is the sum of the prices of its component stocks. The S&P 500’s numerator is the sum of the market values of its components.
Each index has its own divisor. Each is adjusted regularly to keep the level of its index constant. The adjustments address changes, such as the deletion of one component and the addition of another, which would otherwise create a significant spike or drop in the index level. A divisor adjustment is also required when a stock in The Dow is split and its price is reduced.
Both The Dow and the S&P 500 are calculated two ways: as price return indices and total return indices. The difference is that a total return index factors in the impact of reinvesting the dividends paid by the constituent stocks.
Historically, the performance of The Dow and the S&P 500 have been highly correlated—rising and falling in response to the same market stimuli.
That correlation is hardly surprising, given their similar exposures. They also tend to have similar, though not identical, levels of volatility. But there are important differences in performance that reflect the differences in their composition and style.
The Dow contains far fewer stocks than the S&P 500, and as a result, can exhibit higher risk. However, it sometimes has lost less value than the S&P 500 in poorly performing markets, such as 2009, and sometimes has gained less in strong markets, such as 2013 and 2019. In these circumstances, one contributing factor is that historically The Dow has been somewhat more value-oriented, tracking well-established large-cap companies whose prices can tend to be less volatile.
The S&P 500, while more diversified than The Dow, is sometimes more volatile. When that’s the case, it can be because the S&P 500 includes a large number of smaller companies whose prices typically change more dramatically and more frequently than the prices of the largest stocks in the index. As a result, the S&P 500 has lost significant value in some poorly performing markets, such as 2001 and 2009, but also has shown substantial gains in some strong markets, such as 2013 and 2019.
There’s no question that The Dow and the S&P 500 differ in some ways. But what they share is infinitely more important: integrity and reliability, plus a history of serving as informative gauges of stock market performance.
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