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The Dow Jones Average: The Impact of Fixing Its Flaws

Feb 2000
Working Paper
99-016
By  John Shoven
The Dow Jones Industrial Average is a flawed index. The index uses price weights instead of conceptually superior market valuation weights, the companies included in the index are not chosen systematically and are not very representative of the U.S. market, and the index ignores returns from dividends. This paper shows that alternative stock price indices which use superior weighting methods and a more systematic inclusion criterion perform very similarly to the Dow Jones Industrial Average. However, ignoring dividends underestimates the long-run returns earned by stock market investors dramatically. If Dow Jones & Co. had included dividend returns in the DJIA when it was reformed in 1928, the index would be over 250,000 today.