Understanding the DJIA: How Price-Weighted Index Performance Attributions Differ From Cap-Weighted
When viewing market index performance numbers, it is important to remember the difference between capitalization-weighted indices such as the S&P 500 Index (SPX) and price-weighted indices like the Dow Jones Industrial Average (DJIA). While a cap-weighted index derives its performance from the movement of the underlying holdings multiplied by their respective allocations as determined by market cap, the Dow Jones Industrial Average is a price-weighted index, which simply means that stocks with the highest share price receive the greatest weighting in the index.
This week, a former DJIA leading constituent, Boeing (BA), has been making waves and heavily impacting the Index as its price continues to rise. Recall that this time last year, BA traded at $345 per share and consequently had the largest weighting in the index at 9.23%. However, after a stunning fall to a multi-year low of $89 in March, Boeing played not only an outsized impact on the DJIA on the way down but also became a much smaller contributor to any potential gains as its share price was significantly reduced.
Yet this week Boeing began to make up some lost ground, returning 21.74% to close yesterday's session (6/4) at $184.30 to climb to the seventh-largest DJIA member constituent at 4.81% of the total index weighting. Yesterday's share price appreciation of $7.40 contributed significantly to the DJIA, adding 50.74 total points. While the stock has a long way to go before overtaking the current top price-weighted position Apple (AAPL), it provides an interesting example as to how price-weighted index performance attributions differ from cap-weighted. Below, we break down all single-day returns for each Dow Jones Industrial Average constituent following yesterday's action (June 4, 2020).
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