Why The Dow Is Beating The S&P 500 & Nasdaq

November 15, 2016

It's no secret that the stock market jumped after Donald Trump's surprising victory in the U.S. presidential elections last week. The promise of lower taxes and regulations, as well as increased spending on infrastructure fueled what many have called the "Trump rally" in stocks.

But depending what index or ETF you look at, the story of just how well stocks have done since the elections can vary quite a bit. The SPDR S&P 500 ETF (SPY), for example, rose by 1.2% in the period between Nov. 8 and Nov. 14. SPY tracks the S&P 500, which is the most widely followed U.S. stock market index by investors.

SPY's rally put it back to where it was trading in September and October, but it fell just short of its all-time high set in August.

That's in contrast to the SPDR Dow Jones Industrial Average ETF (DIA), which climbed to a record high on Monday, and rose by 2.9% in the post-election period. DIA tracks the Dow Jones industrial average, which is perhaps the most recognizable stock market index for the layperson.

The S&P 500 and the Dow Jones industrial average are two of the three stock indexes frequently quoted by the financial press. The other is the Nasdaq Composite, an index tracked by the Fidelity Nasdaq Composite Tracking Stock (ONEQ). Since the election, ONEQ has been a relative laggard, gaining only 0.6%.

Returns For SPY, DIA, ONEQ Since Nov. 8

 

Index Construction Dramatically Different

The variation in the performance between the big three indexes and the ETFs that track them isn't unusual, but in light of the heightened focus on stocks by everyone in the country following the elections, it's worth explaining what's going on.

The three indexes are each constructed very differently. The S&P 500 is an index comprising the 500 large-cap U.S. companies selected by committee. Stocks within the S&P 500 are weighted by market capitalization, which means that larger companies get a larger weighting in the index.

Meanwhile, the Dow Jones industrial average measures the performance of 30 committee-selected blue chip companies. With only 30 stocks in the Dow, it's an exclusive index typically comprising large, household names. Importantly, the Dow is a price-weighted index, so companies with higher stock prices get the largest weighting in the index, regardless of their market capitalization.

Then there's the Nasdaq Composite, which measures the performance of all stocks listed on the Nasdaq stock exchange. The Nasdaq is a market-cap-weighted index.

 

 

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