The Dow Still Matters -- but Here's an Even Hotter Index


I've been known to berate the venerable Dow Jones Industrial Average for a couple of simple reasons. For one, the 30 chosen tickers don't always reflect the broader stock market or the American economy in general. Far worse, the Dow is weighted by share price. This strange choice means that IBM's price moves affect Dow values about twice as much as ExxonMobil's -- even though the oil giant sports nearly double Big Blue's market cap. And never mind that Exxon produces stronger cash flows on nearly five times IBM's annual revenue. Doesn't matter, because IBM has divided its public ownership into fewer shares. At nearly $200 per share, IBM moves the Dow needle much more easily than Exxon's paltry $100 per-share ticket.

But for all its flaws, the Dow has actually tracked the broader market pretty well over the years.

^DJI Chart
^DJI Chart

^DJI data by YCharts.

The S&P 500 is a less elite selection of 500 major businesses, weighted by float-adjusted market caps. The Russell 3000 includes the 3,000 largest U.S. companies, measured and weighted by total market value. Given the market cap focus, Exxon duels Apple for these weighting thrones.

Both of these broader-market trackers have outperformed the Dow over the last decade, but it's hardly a crushing defeat. Hand-picked curation has kept the Dow reasonably close to these rival indexes. So I simply cannot point to that chart and ask you to ignore the Dow.

But have you seen this chart?

^DJI Chart
^DJI Chart

^DJI data by YCharts

The Nasdaq Composite index tracks every stock, share, and depositary receipt traded on the Nasdaq market -- currently more than 3,000 tickers. The 100 index whittles that large field down to "100 of the largest domestic and international non-financial securities." So there are no banks -- but plenty of tech stocks. Both of these are weighted by market cap, just like the Russell and similar to the S&P 500.

Once again, Apple's titanic market cap makes Cupertino crucially important to the Nasdaq trackers. But Exxon trades on the NYSE, so Google snags the runner-up title here.

The vast majority of the Nasdaq companies work in computer hardware, software, and services, with a generous side of biotech specialists. If you're interested in growth stocks at all, this is where you should be looking.

Make sure you start 2013 with a bang and get the inside scoop on what Motley Fool super-investor David Gardner will be buying this year. He has crushed the market in his Stock Advisor and Rule Breakers portfolios for years, and now I invite you to a personal tour of his flagship stock-picking service: Supernova. Just click here now for instant access.

The article The Dow Still Matters -- but Here's an Even Hotter Index originally appeared on

Fool contributor Anders Bylund owns shares of Google, but he holds no other position in any company mentioned. Check out Anders' bio and holdings or follow him on Twitter and Google+.The Motley Fool owns shares of International Business Machines, Google, ExxonMobil, and Apple. Motley Fool newsletter services have recommended buying shares of Google and Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended creating a synthetic long position in International Business Machines. The Motley Fool has a disclosure policy.
We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.