Delta Air Lines, Inc. (DAL), United Continental Holdings Inc (UAL): Why the Dow Overshadows These Forgotten Stocks

Why don’t people follow the Dow Composite?
If the Dow Composite is more complete than the Dow Industrials, then you have to wonder why the composite never gained in popularity. One reason has to do with the diversification within the Dow Industrials. Because the industrial focus of the Dow got watered down with the addition of non-industrial stocks to the average, combining the industrials with the transports and utilities leads to overweighting of the components from the two other Dow averages. Consider: The Dow Transports have 20 stocks and the Dow Utilities 15, but the Dow Industrials include only about five financial stocks, two energy stocks, and a similar small contingent from the rest of the sectors in the market.

Perhaps more importantly, the Dow Composite has tracked very closely with the Dow Industrials over time. Despite some periods during which performance differed in one direction of the other — particularly the 1990s and early 2000s, when the Dow outperformed the composite before giving back ground during the financial crisis — the Dow Composite doesn’t add enough diversification to make it worth tracking instead of the Dow.

Still, the key lesson is to understand that the Dow is just one measure of the stock market. Looking more broadly beyond the Dow can give you additional insight that you won’t get from looking solely at 30 blue-chip stocks.

The article Why the Dow Overshadows These Forgotten Stocks originally appeared on Fool.com and is written by Dan Caplinger.

Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter: @DanCaplinger. The Motley Fool has no position in any of the stocks mentioned.

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