They are the two most mentioned indexes in stock commentary, but what is the difference between the Dow Jones and the S&P 500?
Dec. 1, 2022
The Dow Jones Industrial Average (DJINDICES:^DJI) and the S&P 500 (SNPINDEX:^GSPC) are the two most touted market indices. They are indicators of the relative health of the market as a whole and are called upon to give us a quick summary of economic performance. In order to compare the two, I will break down the differences between the Dow and the S&P, their composition, and how to invest in them.
You will notice that the Nasdaq Index (NASDAQINDEX:^IXIC) is usually lumped in with them, however, that does not purport to represent the market as a whole due to its tech-focused composition.
The Dow Jones Industrial Average
The Dow Jones is the oldest and arguably least intuitive index. It consists of 30 large-cap companies that represent the might of American industry. It is made up of household names like McDonald's, IBM, and Boeing and is generally used as a gauge for the relative strength of the U.S. economy.
However, it does have one inherent flaw that makes it less reliable than the S&P as a market indicator: it is price-weighted, meaning the company with the highest stock price actually has the biggest impact on the performance of the index. This little quirk means United Health with a market cap one-fifth that of Microsoft's, has almost twice the sway in the performance of the index thanks to its greater stock price. It also means that the index is irrationally impacted by the price fluctuations of certain companies, Boeing being the main culprit in recent times.
How can I invest in the Dow Jones?
The best way of investing in the Dow is through the SPDR Dow Jones Industrial Average ETF (NYSEARCA: DIA), an ETF that groups the 30 companies and weighs them in the same fashion.
The S&P 500
The S&P 500 Index is a basket of 500 of the largest companies of both the New York Stock Exchange (NYSE) and the NASDAQ. A committee selects companies for the index based on a number of different factors including size, industry, and liquidity, and there are specific requirements that need to be satisfied in order to qualify for consideration:
- The company must have a market cap of at least $8.2 billion
- At least 50% of the company's stock must be available to the public
- The company must have positive earnings for the last four quarters
- At least 50% of its assets and revenues must be located in the U.S.
The S&P differs from the Dow in that it is weighted by market cap, meaning the largest companies have the greatest impact on the performance of the index. The breakdown of sectors within the index mimics that of the U.S. economy, showcasing a fair representation of the market's performance across all industries and intrinsically linking itself to the performance of the market as a whole. The index represents 80% of the market cap of the entire stock market. Because of all these factors, the S&P 500 is the most trusted market-tracker. If you hear the term "beating the market," it will always be in relation to this index.
The current 5 largest companies in the S&P right now are:
- Apple
- Microsoft
- Amazon
- Google
- Berkshire Hathaway
How can I invest in the S&P 500?
The best way of investing in the S&P 500 is through the Vanguard S&P 500 ETF (NYSEARCA: VOO), an ETF that tracks the index and gives the same weights to companies.
What's better: the Dow Jones or the S&P 500?
There really is no better or worse when comparing indices. They represent different swaths of companies and so have different properties. If we want to gauge the market performance over a specific time period or compare your portfolio's performance to a certain benchmark, the S&P 500 provides a more accurate representation of the stock market as a whole. Yet economists, commentators, and politicians will almost always use the Dow as a representation of the stock market and the U.S. economy.
Whether you track the Dow Jones, the S&P 500, or even the Nasdaq, it's important to know the exact makeup of companies and how they are weighted. The more you know, the better investor you become.
FAQs
Key Takeaways. The DJIA tracks the stock prices of 30 of the biggest American companies. The S&P 500 tracks 500 large-cap American stocks. Both offer a big-picture view of the state of the stock markets in general.
What is the difference between Dow Jones and S&P 500? ›
The Dow includes 30 large, well-established U.S. companies from various industries. The Nasdaq indexes focus heavily on technology companies but also include other sectors. The S&P 500 includes 500 large U.S. companies from all major industries, providing a broad market representation.
What is one advantage the S&P 500 has in comparison to the Dow Jones Industrial Average DJIA )? ›
S&P 500 vs. Dow Jones Industrial Average (DJIA)
Institutional investors perceive the S&P 500 as being more representative of U.S. equity markets because it includes more stocks across all sectors: 500 versus the Dow's 30.
What are the key differences between the S&P 500 and the Dow Jones Industrial Average (DJIA) in terms of company representation and index calculations? ›
The S&P 500 includes c. 500 companies and is market capitalization weighted, making it more representative of the broader market, while the DJIA tracks 30 companies and is price-weighted, focusing on the stock price regardless of company size.
Should I put my savings in S&P 500? ›
Investing in an S&P 500 fund can instantly diversify your portfolio and is generally considered less risky than purchasing individual stocks directly. Because S&P 500 index funds or ETFs track the performance of the S&P 500, when that index does well, your investment will, too. (The opposite is also true, of course.)
Which is better total stock market or S&P 500? ›
Total stock market index funds are only slightly more diversified than S&P 500 index funds. Since both types of indexes are heavily weighted toward large-cap stocks, the performance of the two funds is highly correlated (similar).
Is the Dow 30 included in the S&P 500? ›
The S&P 500 is a stock market index maintained by S&P Dow Jones Indices. It comprises 503 common stocks which are issued by 500 large-cap companies traded on American stock exchanges (including the 30 companies that compose the Dow Jones Industrial Average).
What is a major difference between the S&P 500 index and the Dow Jones Industrial Average quizlet? ›
The DJIA is based on the price of stocks for 30 large companies; the S&P 500 is based on the price of stocks for 500 companies.
Why is S&P 500 better? ›
Importance of the S&P 500
The S&P 500 is frequently used as a proxy for the value of the entire stock market, since the stocks it contains account for roughly 80% of the total value of stocks that are publicly available for trading. Many investors use it as a benchmark when evaluating their performance.
What is the difference between the S&P 500 and the S&P 100? ›
Less extensive than the S&P 500, the S&P 100 focuses on the 100 largest US companies in the S&P 500 index. This index is representative of the performance of large-cap companies, offering a more targeted view of the leaders in the US market.
But there is one main distinction between these two indexes: The S&P 500 has 500 of the largest companies, which is why some investors believe it provides a more accurate picture of the economy. The Dow Jones, on the other hand, is composed of 30 blue-chip companies.
Should I invest in Nasdaq or S&P? ›
So, if you are looking to own a more diversified basket of stocks, the S&P 500 will be the right fit for you. However, those who are comfortable with the slightly higher risk for the extra returns that investing in Nasdaq 100 based fund might generate will be better off with Nasdaq 100.
What is the Dow Jones for dummies? ›
The Dow Jones Industrial Average is a price-weighted index that tracks the performance of 30 large, publicly-traded companies in the United States. These companies, known as blue-chip stocks, are industry leaders in sectors such as technology, finance, and healthcare.
What if I invested $1000 in S&P 500 10 years ago? ›
So imagine you put $1,000 into either fund 10 years ago. You'd be up to roughly $3,282 with VOO or $3,302 from SPY. That's not exactly wealthy, but it shows how you can more than triple your money by holding an asset with relatively low long-term risk.
Is now a bad time to invest in the S&P 500? ›
Also, research suggests that when it comes to the S&P 500's historical returns, there's never been a bad time to buy as long as you're a long-term investor.
Why not put all my money in S&P 500? ›
The S&P 500 is all US-domiciled companies that over the last ~40 years have accounted for ~50% of all global stocks. By just owning the S&P 500 you miss out on almost half of the global opportunity set which is another ~10,000 public companies.
Which companies are in Dow Jones? ›
Dow 30 Chart
| SYMBOL | NAME | PRICE |
|---|
| JPM | JPMorgan Chase & Co | 212.46 |
| MCD | McDonald's Corp | 289.51 |
| MMM | 3M Co | 128.6 |
| MRK | Merck & Co Inc | 117.84 |
26 more rowsAs of Sept. 21, 2023, the following are the 25 largest S&P 500 index constituents by weight:
- Apple (AAPL): 7.05%
- Microsoft (MSFT): 6.54%
- Amazon (AMZN): 3.24%
- NVIDIA (NVDA): 2.79%
- Alphabet Class A (GOOGL): 2.13%
- Tesla (TSLA): 1.95%
- Alphabet Class C (GOOG): 1.83%
- Berkshire Hathaway (BRK.B): 1.83%
Standard & Poor's (S&P) is a company, a leading index provider, and data source of independent credit ratings. The name comes from the 1941 merger of two financial data publications. Henry Varnum Poor's publication on railroad prices (dating back to 1860), and The Standard Statistics Bureau, which was founded in 1906.
