Three Market Indicies are consistently quoted to share updates regarding the health of the U.S. Stock Market- Dow Jones Industrial Average, Standard and Poors 500, and the NASDAQ-100. Apple Inc (NASDAQ: AAPL), headquartered in Cupertino, California, is the largest publicly traded U.S. company based on an approximate Market Capitalization of $2.48 billion. The company shared its Third Quarter Fiscal Year 2021 Results on July 27, 2021, where it registered $81.43 billion in Total Net Sales for Q3 21, with iPhone and Services segment sales increasing 49.78% and 32.91% compared to Q3 20. Additionally, the Consumer Electronics Maker recorded Net Income and Diluted Earnings Per Share of $21.74 billion and $1.30 for Q3 21, compared to $11.25 billion and $0.65 for Q3 20. Its inclusion in the major U.S. stock market indices is a no-brainer since it is the most significant publicly traded U.S. company on planet Earth.
How Apple Inc is included is where I find divergence in how Apple Inc is treated differently. The Standard & Poor’s 500 and the NASDAQ-100 are market-capitalization-weighted indexes, whereas the Dow Jones Industrial Average is price-weighted. In simple words, the Standard & Poor’s 500 and NASDAQ-100 value market capitalization when ranking the stock within the index, while the Dow Jones Industrial Average uses its share price to organize the stock. This is how Apple Inc is ranked Number 1 and Number 18 daily since 17 other companies indexed into the Dow Jones Industrial Average have a share price higher than that of the most significant publicly traded U.S. company.
At this juncture, one might agree with astute commentators like Mr. Jonathan Ferro of Bloomberg Surveillance regarding the significance of the Dow Jones Industrial Average as it does not justify equity market conditions appropriately. I partially agree that the manner in which the Dow Jones Industrial Average is currently set up and does not offer much to visualize or understand the broader market based on three criteria- composition, ranking, and performance. Firstly, the index does not include any Utilities or Real Estate securities. Secondly, out of the five trillion-dollar “Big-Tech” companies, Apple Inc, alongside Microsoft Corporation (NASDAQ: MSFT), is part of the index with Microsoft Corporation weighed heavier than Apple Inc. And lastly, the Standard and Poors 500 Index registered a 10-year annualized return of 13.02% compared to the 11.15% from the Dow Jones Industrial Average since July 2011.
The argument against the Dow Jones Industrial Average being an archaic index of little significance is that even though the Dow Jones Industrial Average offers a myopic view of the market, there is some value following a specific Dow Jones Industrial Average by-product, the Dow Jones Industrial Average Equal Weight Index.
According to the S&P Dow Indicies, a Division of S&P Global, “The Dow Jones Industrial Average® Equal Weight is the equal-weight version of the Dow Jones Industrial Average, which seeks to measure the performance of 30 U.S. blue-chip companies.” The Dow Jones Industrial Average Equal Weighted Index ranks the companies equally instead of stocks being ranked according to their current share price as found with the Dow Jones Industrial Average. As a result, the same 30 ranked equally. The following visual is rendered when you compared the Dow Jones Industrial Average Equal Weighted Index to the Standard & Poors 500 and the Standard & Poors 500 Equal Weighted Index since July 2011.
As of July 30, 2021, the 10-year annualized return rate of the Dow Jones Industrial Average Equal Weighted Index was 11.34% compared to the 12.09% from the Standard & Poors 500 Equal Weight Index and the 13.02% from the Standard & Poors 500 Index. The Dow Jones Industrial Average consistently quoted by the financial media registered a 10-year annualized return rate of 11.15%, handily underperforming other indices. Even though the Dow Jones Industrial Average offers a minutia of stocks associated with the Standard & Poors 500 and the broader equity market in general, an argument presented is that the Dow Jones Industrial Average Equal Weighted Index offers a unique bisection of the Equity Market. Only 10% of the securities indexed in the Dow Jones Industrial Average have a Market Capitalization of less than $100 billion compared to 87.74% in the Standard and Poors 500 Index. Furthermore, a quick comparison of the SPDR® S&P 500® ETF Trust and the SPDR® Dow Jones® Industrial Average ETF Trust highlights that the Dow Jones Industrial Average has an index dividend yield of 1.76%, 42 basis points better than the 1.34% from the Standard and Poor’s 500 Index. The First Trust Dow 30 Equal Weight ETF that tracks the Dow Jones Industrial Average Equal Weighted Index registered an index yield of 2.10%.
Yes, Apple Inc might be misplaced in the Dow Jones Industrial Average. Still, the Dow Jones Industrial Average allows generalizing the market into sure participants such as Caterpillar Inc (NYSE: CAT), Nike Inc (NYSE: NKE), The Walt Disney Company (NYSE: DIS), and The Home Depot Inc (NYSE: HD) with earmarked reputation and industry status. So might I suggest reviewing the Dow Jones Industrial Average, not for its performance but for its composition and participants. Having any refined view of the equity market is better compared to having no distilled idea since the equity market is filled with securities with promise. Unfortunately, not all of them deliver on their aspirations and goals.