What If the Dow Jones Industrials Tracked Just the 'Industrials'?

Dow Jones Industrial AverageWhen Charles Dow published the first Dow Jones Industrial Average ($INDU) in 1896 the name was more than apt. From American Cotton Oil to U.S. Rubber, there was no doubt the 12 original members of the blue-chip index were indeed smokestack companies one and all. It truly was an industrial average.

More than a hundred years on, the nation has changed, and the Dow, naturally, has changed with it. An economy that was once heavy on heavy industry has become dependent on financial services, technology, big-box retailing and pharmaceuticals. The Dow hasn't really been an "industrial" average since at least 1999, when the keepers of the average replaced Union Carbide, Goodyear Tire & Rubber (GT) and Chevron (CVX) (which was reinstated three years ago) with Microsoft (MSFT), Intel (INTC) and Home Depot (HD).

Today, fewer than a third of the 30 Dow components could still be considered smokestack companies. And yet it's the Dow's industrial members that have been doing the heavy lifting throughout the economy's -- and stock market's -- recovery. On Friday, we learned that industrial production rose in December by the greatest amount in five months. Total industrial activity has gained 11% since hitting its recession low in June 2009.

So perhaps it should come as no surprise that without the hardcore industrial components of the blue-chip average, the market's gains, as measured by the Dow, would look much, much worse over the past couple of years. By the same token, a DJIA comprising just its industrials would have fared much, much better. See the chart below.



The Dow was last reconstituted in June 2009, when Citigroup (C) and General Motors (GM) became wards of the state and were replaced with Travelers (TRV) and Cisco (CSCO). Using that date as a starting point, we broke the Dow out into two separate price-weighted indexes (because the DJIA is weighted by price), to try to isolate the contribution of today's smokestack companies.

Lo and behold: An all-industrial DJIA would stand at nearly 13,000 by now -- or more than a thousand points greater than its current level.

The actual DJIA is up 34% since June 8, 2009 (as of Wednesday's close), but a Dow consisting of just nine industrial names -- 3M (MMM), Alcoa (AA), Boeing (BA), Caterpillar (CAT), Chevron (CVX), DuPont (DD), Exxon Mobil (XOM), General Electric (GE) and United Technologies (UTX) -- would have gained 48% over the same span.

At the same time, a 21-member Dow that excludes the industrial names would have posted a gain of just 28% -- and be sitting at 11,238, or more than 500 points below where it is today.

This experiment has a couple of obvious takeaways. First, diversification mitigates risk. Notice how much more volatile the industrials-only Dow is compared with the actual Dow or to our 21-member non-industrials Dow. Second, energy, commodities, chemicals and capital goods have been a good bet in the last couple years, helped in no small part by the global economy's hotter corners. Thanks, China.


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L R Adams

The level of risk is significant if we predicate investments based on the *Industrials*. But as with everything there would be a benefit. See if you can get AOL to agree to run a 6 month pilot and post it the on the board.

January 20 2011 at 12:19 PM Report abuse rate up rate down Reply
sjoberdix

When the dow jones industrial gets back to basic and rids its self of the companies that produce profits but no value, who bit the every hand that feeds it and have laws enacted to protect its customers. These companies need to be eliminated for it has no credible value. And the fat lady is about to sing when WikiLeaks files from the ex swiss banker are released. Its not that we don't all ready know, its the evidence to prove how corrupt wallstreet and our bought politicians really are.

January 18 2011 at 7:02 AM Report abuse rate up rate down Reply
GrayHatsBeGone

IBM execs had better get some really good explanations ready for the upcoming IBM PONZI RICO trial !!!

Details and links --
www.ibmTheWidowMaker.com
Twitter -- www.Twitter.com/MadamePJBailey (IBM Widow)

January 18 2011 at 5:28 AM Report abuse rate up rate down Reply
aftonmoon

What this tells me is that the real wealth of this nation is iin manufacturing, the very segment of the economy that is sent offshore. American must once again begin to manufacture things, from toaster to space ships.

January 18 2011 at 4:40 AM Report abuse +1 rate up rate down Reply
alfredschrader

With bio-engineering it is possible to create a plant that makes crude oil.
The People at Genentech already know how to do it...Al-

January 17 2011 at 8:36 PM Report abuse +3 rate up rate down Reply
1 reply to alfredschrader's comment
icemanbill23

Yeah, it's delicious!...just add it to your salad with a little vinegar and you're good to go!

January 17 2011 at 11:43 PM Report abuse +2 rate up rate down Reply
gardeningatnite

The point is: 30 years of corporate welfare for ethanol and it is one of the worst fuel substitutes known to man!...But, republicans love the money!

January 17 2011 at 7:59 PM Report abuse rate up rate down Reply
3 replies to gardeningatnite's comment
gardeningatnite

Republicans are the most fiercist ethanol loyalists. They get boatloads of ADM related money....... More important, the GOP sees the ethanol program as a vital subsidy for their farm-state constituents....Ethanol has become Republican pork. Newt Gingrich even loved ethanol!!! Pork! Pork! and more Pork.......OUCH!

January 17 2011 at 7:54 PM Report abuse +1 rate up rate down Reply
1 reply to gardeningatnite's comment
gardeningatnite

Don't feel bad............they gave democrats about a quarter of the money......you know! (just in case) LOL!

January 17 2011 at 7:57 PM Report abuse rate up rate down Reply
LEE Resolution

Time for 'The Factor'. Tune in pop tart, you just may learn something...

January 17 2011 at 7:49 PM Report abuse -2 rate up rate down Reply
1 reply to LEE Resolution's comment
gardeningatnite

OMG!.........That guy is tall!

January 17 2011 at 7:50 PM Report abuse -1 rate up rate down Reply
gardeningatnite

During the 1992 election, ADM gave $1 million to Bob Dole and his friends in the GOP

January 17 2011 at 7:47 PM Report abuse rate up rate down Reply
1 reply to gardeningatnite's comment
gardeningatnite

It disputes no history.........ethanol is a loser and the republicans and bill clinton were losers.......so??

January 17 2011 at 7:52 PM Report abuse -2 rate up rate down Reply
LEE Resolution

gardeningatnite
7:43 PM Jan 17, 2011



Poor baby, history is not your strong suit???.........Don't worry, be happy!

**************

I'd stay away from anything 'historical'. It's not your strongest suit.

January 17 2011 at 7:46 PM Report abuse +1 rate up rate down Reply
1 reply to LEE Resolution's comment
gardeningatnite

It's okay to be wrong!.....(we don't hold that against you)

January 17 2011 at 7:55 PM Report abuse -1 rate up rate down Reply