Are The Dow, ETF Distorted?

Economists tend to be almost fanatical about maintaining precise data in our economy, but recent events may show that the Dow Jones Industrial Average (DJIA) (^DJI) and its subsequent exchange traded fund (ETF) may be misrepresented.

The DJIA is a weighted index with a ratio of $1 to index 7.96 points, reports James A. Bianco, CEO of Bianco Research, LLC for The Big Picture. The index committee is not doing its job correctly because the index is now being “distorted” by tiny weightings in autos and financials.

The DJIA has an unspoken rule that any individual stock that drops below $10 will get unceremoniously kicked out. As of January 20th, The DIJA has Citi (C), GM (GM), B of A (BAC), and Alcoa (AA) below this 10 dollar mark. It is calculated that if these stocks were zero then the DJIA would drop by around 157 points. If all financial stocks in the DJIA were zero, then the index would lose around 331 points.

The DJIA is accredited with outperforming on the downside because the index committee is not doing the job of replacing the low value stocks and the index cannot be pushed much lower by the already trampled financials.

This is an important lesson on why broader indexes are better. While the Dow is what people hear about most often on a day-to-day basis, with just 30 components, it’s not truly reflective of what’s going on in the economy.

• The Dow Jones Tracked ETF, Diamonds Trust (DIA), is down 2.0% the last week and down 4.7% the last month.

Subscribe by RSS Subscribe by Email