Did You Know the Dow Jones Has Crushed the S&P 500 Over The Past 30 Years

Matt Thalman - INO.com Contributor - ETFs

The Dow Jones Industrial Average (^DJI) has been hated on by investors for years. Most believe it is inferior to the S&P 500 Index (^GSPC) due to its price weighting formulation as opposed to market capitalization weighting, the fact that it only consists of 30 as opposed to 500 stocks, and until just recently it didn’t even hold the largest company in the world, Apple (AAPL) in it, just to name a few.

But for all its flaws it was shocking to me to see a comparison of the Dow's performance to that of the S&P 500 over different time frames.

Take a look at the table below.

Timefame Dow Performance S&P 500 Performance
YTD -0.81% -0.13%
1 Year 8.69% 11.20%
2 Year 21.70% 31.56%
5 Year 61.78% 74.53%
10 Year 73.44% 77.74%
15 Year 60.33% 34.93%
20 Year 241.45% 231.25%
30 Year 1,273.85% 1,034.87%

Figures from Yahoo! Finance (click on timeframe above to see actual Yahoo! chart for corresponding timeframe)

Over the past ten years, the Dow has been beaten by the S&P 500, but not by a massive amount. Fifteen years ago the Dow clobbered the S&P 500 and over the past 30 years, investors would have been substantially better off owning a Dow index fund such as the SPDR Dow Jones Industrial Average ETF (DIA) or the iShares Dow Jones US (IYY) as opposed to owning an S&P 500 index ETF such as the SPDR S&P 500 ETF (SPY) or the Vanguard S&P 500 ETF (VOO).

After seeing this information, I began to wonder why the Dow would have performed so much better, than what most investors consider the more superior index, over those longer periods of time but not in recent history. Here is what I came up with.

The first timeframe that popped out at me was the 15-year mark. Over the last 15-years, the Dow has beaten the S&P 500 by 25%. That is an astonishing amount considering the S&P 500 is up only 34.93% over that period. But, this would make sense if we think about what happened 15 years ago. The dot-com boom and then bust in March of 2000.

In 2000 the Dow's exposure to technology stocks consisted of Hewlett-Packard (HPQ), IBM (IBM), Intel (INTC), Microsoft (MSFT), AT&T (T) and SBC Communications, if you want to consider the last two "technology" companies. Despite being large companies, they were all obviously were hurt by the bubble busting, but they all made it through the crash.
In the year 2000 technology stocks made up 34% of the S&P 500. All of the tech stocks mentioned above were also part of the S&P 500 in 2000 but so were a few hundred other technology stocks which were not as large nor had the ability to withstand the crash. When the tech bubble burst the S&P 500 was crushed as a large portion of its tech companies either went bankrupt or had their value severely reduced. The massive drop in tech stocks value hurt the S&P 500 more than it hurt the Dow in 2000, giving us the massive 25% difference in performance between the two indexes.

I believe the example in 2000 is an example of why the Dow has outperformed the S&P 500 over the past 30 years by again such a large margin. When a Dow component begins to falter from a business sense, the stock can be dropped and another one can be added. We see the Dow components changed every few years. But when an S&P 500 component falters, it continues to pull down the index until it falls out of being one of the top 500 companies. For example if an S&P 500 component currently ranks as the 75th largest company in the index but falls on hard times it will slide lower within the index and, therefore, lose its weight, but it will still pull the index down as it falls until it has lost enough market cap to no longer be considered one of the largest 500 companies.

The flip side could also be said; if a stock climbs it was up the ladder, gets added to the S&P 500 index and continues to build its business, growing into the top 100 companies, the movement upward would help the S&P 500. Whereas for the Dow, that stock would likely not even be in the index even after it grew into maturity, thus never having the chance to affect the Dow positively. This is why I believe the S&P 500 has outperformed the Dow over the past 10+ years.

Since the dot-com bubble burst the technology companies that which were young then but made it or that have popped up since have pushed the S&P 500 higher, faster while the Dow has never benefitted from their rise. Think of Google (GOOG), Amazon.com (AMZN), Priceline.com (PCLN), Netflix (NFLX), Tesla (TSLA), Facebook (FB), or how about Apple just to name a few big players. These stocks were essentially or literally nothing 15 years ago and now they are some of the world's largest companies. They grew from tiny sprouts and helped push the S&P 500 upwards but have never, up until a few days ago when Apple was added to the Dow, affected the Dow's price.

The Dow's small number of components is both its savior sometimes and its demon in others and the same can be said for the S&P 500. At the end of the day, neither index is perfect for all investors and all scenarios, which is why each investor should consider what it is exactly they want from the investment vehicle they buy, before making the purchase.

Matt Thalman
INO.com Contributor - ETFs
Follow me on Twitter @mthalman5513

Disclosure: This contributor held long positions in Apple, Tesla, Intel, Google, Amazon.com, Facebook, Priceline and Microsoft at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.