Price-weighting influence on DIA

Discussion in 'ETFs' started by Trader13, Jul 22, 2011.

  1. Trader13


    Most traders already know that the Dow Industrials index is price-weighted, meaning that stocks with high share prices account for a larger portion of the index. Other equity indexes, like the S&P 500, are capitalization-weighted.

    While the Dow is often referenced as a benchmark for the broad market, its price level is really determined by a small handful of pricey stocks. In fact, over half of the advance in the Dow this year is attributed to only three stocks: IBM, Caterpillar, and Chevron. (This is something to be keenly aware of if you ever pair/spread trade the DIA).

    OK, so what's interesting is this chart I ran across today that shows what the Dow would be if high-flyer Apple were in the index instead of low-flyer Cisco. This simple choice of one technology stock over another makes a big difference. Enjoy: