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Are the S&P 500 and Dow Jones Industrial Average Really Objective Indexes?

August 08, 2018

The Russell Indexes such as 1000 (large companies), 2000 (small companies), and 3000 (total market) are calculated based on total market capitalization (number of outstanding shares times the share price).

When people talk about indexes, they usually assume a statistical framework captures companies for the index. However, the S&P 500 actually has a committee that adds/subtracts companies to be included.

For instance, last year Advanced Micro Devices, Raymond James, Inc., and Alexandria Real Estate Equities were added. Deleted were Urban Outfitters, Frontier Communications, and First Solar.

The S&P 500 is calculated based on the weighted average market calculation: The sum of the adjusted market cap divided by an index divisor which is proprietary to Standard & Poors resulting in the weighting skewed to larger companies.

The same is true for the Dow Jones Industrial Average (DJIA). Over the last several years, a committee made the following changes:

DELETED ADDED YEAR
Citigroup Traveler’s Companies 2009
General Motors Cisco Systems 2009
Kraft UnitedHealth Group 2012
Alcoa Nike 2013
Bank of America Goldman Sachs 2013
Hewlett Packard Visa 2013
AT&T Apple 2015

 

Also, the calculation for the DJIA is based on price weighted as opposed to market weighted. The sum of the stock prices is divided by what is called the Dow Divisor created by Dow Jones.

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