The Dow Jones Industrial Average: Blue-Chip Legacy

What is the Dow Jones?

The Dow Jones Industrial Average (ticker: ^DJI) is a price-weighted index of 30 of the largest and most widely-owned companies in the United States. Created in 1884 by Charles Dow and Edward Jones, it's the second-oldest U.S. stock market index (after the S&P 500). The "30" refers to 30 blue-chip stocks selected by the editors of The Wall Street Journal, which is owned by Dow Jones & Company.

The main investment vehicles for Dow exposure are:

• DIA: SPDR Dow Jones Industrial Average ETF (most popular)
• UDOW: ProShares Ultra Dow Jones (3x leveraged Dow ETF)
• ^DJI: The Dow Jones Index itself (not traded directly)

Why "Blue-Chip"?

The term "blue-chip" refers to the highest-value poker chips—blue chips. By analogy, blue-chip stocks are the highest-quality, most stable companies. Dow components include:

• Apple, Microsoft, Intel, Cisco: Technology leaders
• JPMorgan Chase, Goldman Sachs: Financial institutions
• Coca-Cola, Walmart, Home Depot: Consumer staples and retailers
• Boeing, 3M, Caterpillar: Industrial manufacturers
• Johnson & Johnson, Pfizer, Merck: Healthcare giants
• ExxonMobil, Chevron: Energy companies

How the Dow is Calculated

Unlike the S&P 500 (market-cap weighted) or NASDAQ-100 (modified market-cap weighted), the Dow is price-weighted. This means higher-priced stocks have more influence on the index. For example, a stock trading at $300/share has twice the impact of one at $150/share, regardless of market cap. This unique calculation method means the Dow's movements can differ from broader market indices.

Characteristics of the Dow

Stability and Dividends: Dow stocks tend to be mature companies with stable earnings and healthy dividend yields. They're preferred by income-focused investors.

Lower Volatility: Blue-chip stocks experience smaller price swings than growth-focused indices like the NASDAQ. This makes the Dow less suited for volatility trading but attractive for conservative investors.

Cyclical Nature: The Dow includes many industrial and financial stocks that perform better during economic expansions and worse during recessions. This cyclicality makes the 200-day SMA strategy valuable.

Global Economic Indicator: Because it includes multinational companies, the Dow's performance reflects global economic conditions, not just U.S. domestic demand.

Sector Composition

The Dow has a more balanced sector composition than the NASDAQ, with greater exposure to traditional industries. Here's the breakdown:

Pie chart showing the approximate sector breakdown of the Dow Jones Industrial Average.

The 200-Day SMA Strategy on the Dow

While the Dow is less volatile than growth-focused indices, the 200-day SMA strategy still provides value by timing cyclical swings:

• BUY Signal: When DIA rises above its 200-day SMA, invest in UDOW (3x leveraged Dow ETF)
• SELL Signal: When DIA falls below its 200-day SMA, move to cash to avoid downturns

The strategy helps capture gains during economic expansions when blue-chips perform well while avoiding bear markets and recessions. The Dow's dividend-paying stocks make it particularly attractive for investors who want both capital appreciation and income.

The Dow vs Other Indices

Dow: Most conservative, dividend-focused, lower volatility, 30 stocks

S&P 500: Balanced large-cap exposure, 500 stocks, moderate volatility

NASDAQ-100: Growth-focused, tech-heavy, higher volatility, 100 stocks

Best Practice: Conservative investors may prefer the Dow, while growth-oriented investors often favor the NASDAQ. Many investors hold all three for true diversification across investment styles.