How Much the Dow Matters, if at All…

by Inya Ivkovic, MA

Although largely symbolic these days, the 30-stock Dow Jones Industrial Average still attracts a lot of attention, particularly when the powers that be tweak it a little. And even more so when certain “kings of old,” such as General Motors and Citigroup, get dumped in a worse way than two of the nerdiest girls in school before the prom.

Yet people still pay attention, because the Dow was originally envisioned to reflect the best and the mightiest companies that the U.S. industrial sector had to offer. So, when venerable institutions such as General Motors and Citigroup are to be booted off next week, only to be replaced by Cisco Systems and Travelers Companies Inc., the Dow’s relevance as a leading benchmark appears to be underscored even more.

But there is more going on there than just losing GM and Citigroup, although both of them absolutely deserve to be dumped. What I mean is that General Motors wasn’t replaced by another car-maker simply because there wasn’t one available. The only North American automaker still left standing, more or less, is Ford, but it’s no longer one of the best and the mightiest, but rather just another money-losing bottomless pit, the shares of which are still free-falling.

And for those among you who thought of perhaps Toyota Motor Corp. replacing GM, well, having a Japanese company on the Dow would not exactly represent the U.S. industrial sector, now would it? The Dow has always been about appearances, so having a foreign company represent the U.S. auto sector during these vulnerable times could suggest some ugly things about the health of Corporate America.

In all honesty, these days, the collection of the bluest among the blue-chips within the Dow looks downright pathetic. It’s not just General Motors and Citigroup, the newest exiles. There were three companies last year that also got booted: Honeywell International, Altria Group, and American International Group were replaced by Bank of America, Chevron, and Kraft Foods.

In a way, the Dow can be considered as a contrarian indicator. Just before the technology bubble burst in 1999, the Dow invited Microsoft and Intel into its fold, and both companies shed significant market cap not long after getting accepted. And just before Chevron got the nod in 2008, the stock skyrocketed 140%, only to lose 20% after it joined the index. As for Bank of America, well, the bank’s shares lost 72% so far and its quarterly dividend got cut and cut — and then cut some more to $0.01, from $0.64 at its peak.

But nothing highlights the Dow’s increasingly obvious irrelevance in the world of famous benchmarks than the almost trivial amount of money being put into exchange-traded fund (ETF) that tracks the index — the Diamonds ETF. To put things in perspective, the Diamonds ETF has a market cap of just under $7.0 billion and trades an average of 20 million units on any given day. In contrast, the ETF that tracks the S&P500, the SPDR ETF, has a market cap of $61.0 billion and trades an average of 315 million units per day. Even in terms of real money, the Dow cannot compete. In other words, all that the Dow has left is elite membership, but the waters have been muddied with certain recurring themes: government ownership is bad; technology is good; and anything foreign is not welcome.