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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Unless otherwise stated, the performance information included in this article does not include all potential transaction costs. Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.

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Dorsey Wright’s relative strength strategy is not a guarantee. There may be times when all assets are unfavorable and depreciate in value. Relative Strength is a measure of price momentum based on historical price activity. Relative Strength is not predictive and there is no assurance that forecasts based on relative strength can be relied upon to be successful or outperform any index, asset, or strategy.

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Nasdaq Dorsey Wright is a registered investment advisory firm with more than 30 years of expertise is technical analysis, specifically focusing on the steadfast relationship between supply and demand in the markets. Our research and tools help our clients see through the day-to-day clutter of market movements while providing a clear understanding of where market strength lies at all times.

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