One of the intriguing quirks of financial history is that the Dow Jones Index has become the benchmark of the health of the US stockmarket and by extension a metric everyone else is fascinated in.It is interesting that the Dow has become this because of its strange mechanism of calculation and is somewhat anachronistic view of the world. In many ways it is little more than a favourites index or watchlist and this becomes apparent when you look at the quirks in its construction. If you look at the S&P/ASX 20 you see that it is what is known as a capitalisation index – that is the biggest companies have the most heft within the index. If you look at the table below you can see the market capitalisation of its components along with their weighting within the index.
In this sort of index size counts but that is not the way the Dow works. Below are the relative market caps of the Dow components.
You can see that Apple with a market capitalisation of $675 billion dwarfs everyone else – it is simply enormous. However, something odd happens when you graph the weightings of the components.
Goldman Sachs with a market capitalisation of only $95 billion makes up almost 8% of the index compared to Apples 4.45%. So a stock with a market capitalisation that is 14% that of Apple has a weighting just short of twice that of Apple. It is an odd thing when history overtakes common sense.
