Understanding the Dow 30 Index: Key Companies and Economic Impact

What Is the US 30?

The Dow 30 is a major U.S. stock market index made up of 30 large, well-established companies. Officially called the Dow Jones Industrial Average (DJIA), it is considered an indicator of the U.S. market and economy. Managed by S&P Dow Jones Indices, the Dow 30 is unique because it is price-weighted, so companies with higher stock prices have more influence on it. It dates back to 1896 and serves as a historical benchmark and an investment tool through ETFs and other products. While influential, the Dow 30 is criticized for representing only a small portion of the market, especially when compared with broader indices like the S&P 500.

How the Dow 30 Reflects the Stock Market and Economy

When the media reports that the stock market is up or down for the day, they often mean the US 30. Its movements are used as a proxy for the stock market's overall performance.

The US 30 is also used as an indicator of the general health of the U.S. economy. The companies in the Dow provide many jobs, and its goods and services are used by many, if not most, Americans. Their success relies on the population’s spending habits.

In other words, when US 30 companies do well, it generally means the economy is in good shape. When they start to stutter, it suggests that bad times could be coming.

Investors can put money into the US 30 via exchange-traded funds (ETFs) such as the SPDR Dow Jones Industrial Average ETF and the iShares Dow Jones U.S. ETF.

These ETFs give investors the chance to buy a stake in 30 of America’s largest, most significant publicly-owned companies. These are blue chip stocks with big customer bases, steady revenues and profits, and excess cash. That makes them highly sought after.

The Evolution and History of the Dow 30 Index

The US 30 was created by journalist Charles Dow and his business partner Edward Jones in 1896. It's the second oldest stock market index in the U.S. They also founded the Wall Street Journal.

The Dow 30 was developed to track the overall performance of the U.S. stock market when information flow was relatively limited. The idea was to let ordinary investors know the market's direction.

The original index consisted of 12 companies that were considered important to America's economy. They were:

• American Cotton Oil
• American Sugar
• American Tobacco
• Chicago Gas
• Distilling & Cattle Feeding
• General Electric
• Laclede Gas
• National Lead
• North American Utility
• Tennessee Coal and Iron
• U.S. Leather pfd.
• U.S. Rubber

As this list illustrates, the economy of 19th-century America was much more focused on producing commodities.

The Dow grew to include 20 stocks in 1916 and 30 stocks in 1928.

The Companies Behind the Dow 30 Index

The full name of the US 30 is the Dow Jones Industrial Average, which today is a bit misleading. In its early years, the titans of American business were the heavy industries that helped transform America during the Industrial Revolution.

The name has stuck, even though the U.S. economy and the index’s constituents have changed significantly.

There are no firm guidelines for including a company in the US 30 or for dropping it. A committee of S&P Dow Jones Indices and Wall Street Journal executives decides which companies make the cut. The only criteria are that those included must have an “excellent reputation," demonstrate “sustained growth,” and be “of interest to a large number of investors.”

Below is a list of the companies included in the Dow 30:

As you can see, the companies currently in the index are household names spanning a range of different business sectors. And many of them have been in the index for many years. The index's composition can theoretically change anytime, but changes are infrequent.

Calculating the Dow 30: Methodology and Mechanics

The Dow 30 isn’t calculated like other leading indexes tasked with tracking the stock market's performance. 

Its value is computed by adding up all the stock prices of its 30 components and dividing the sum by what is known as the Dow divisor, a number used to account for corporate actions such as stock splits, mergers, and dividend payments.

The Dow 30 is also price-weighted, meaning it places great emphasis on share prices rather than market capitalization. Essentially, the higher or more expensive the share price, the larger a company’s weighting in the index is.

Comparing the Dow 30 and S&P 500: Key Differences

Comparisons are often made between the Dow Jones Industrial Average (DJIA) and the S&P 500.

While both use the same strategy of measuring stock market performance through representative companies, there are significant differences in their methodology. For example, the DJIA is price-weighted, while the S&P 500 is market-capitalization-weighted.

They also use significantly different criteria to include companies in their listings.

Moreover, the S&P 500 is preferred by some simply because it reflects the performance of 500 major companies rather than just 30.

Limitations and Criticisms of the Dow 30

Many critics of the Dow argue that it doesn't significantly represent the state of the U.S. economy as it consists of only 30 large-cap U.S. companies. They believe the number is too small and neglects companies of different sizes.

Many critics believe the S&P 500 is a better representation of the economy as it includes significantly more companies, 500 versus 30, which by nature is more diversified.

Furthermore, critics believe that factoring only the price of a stock in the calculation, and not its market cap, does not accurately reflect a company's performance. It gives a company with a higher stock price but a smaller market cap more weight than a company with a smaller stock price but a larger market cap.

The Bottom Line

The Dow 30 has been a key U.S. stock market index since 1896, featuring 30 major blue-chip companies. It's an important barometer for the stock market and the economy, reflecting the financial health of America’s largest corporations. Unlike other indices, the Dow is price-weighted, meaning higher-priced stocks have more influence on its movement. Investors can track the index through ETFs, gaining exposure to these leading companies.