The Dow Jones Industrial Average

Abstract

The Dow Jones Industrial Average is a flawed index. The index uses price weights instead of conceptually superior market valuation weights. The companies included in the index are not chosen systematically and are not very representative of the U.S. market; and the index ignores returns from dividends. This article shows that alternative stock price indexes that use superior weighting methods and a more systematic inclusion criterion perform very similarly to the Dow Jones Industrial Average, but, ignoring dividends dramatically underestimates the long-run returns earned by stock market investors. If Dow Jones & Co. had included dividend returns in the DJIA when it was formed in 1928, the index would be over 250,000 today.