Live to be 125 years old, and you’ve seen a lot. The Dow Jones Industrial Average certainly fits that description.
The Dow turned 125 in May, but it’s hardly in a retiring mood. The oft-cited stock index originated during a time when smokestacks and slaughterhouses dominated the American economy, but today’s Dow very much reflects our digital age. Plus, everyone knows what it is and what it stands for, said Jamie Farmer, chief commercial officer with S&P Dow Jones Indices.
The Dow’s story “is really one of consistency and longevity,” said Farmer, whose company runs the Dow and other equity indexes, such as the S&P 500.
The Dow, Farmer continued, is “a trusted barometer and trusted brand of market performance. For 125 years, the Dow has been the leading stock market indicator, a role it’s served through economic expansion and contraction, through times of peace and conflict. Its composition has reflected the birth and death of companies and entire segments of American industry.”
Farmer joined Tim McCourt, CME Group’s global head of equity index & alternative investment products, for a recent virtual Q&A session to mark the Dow’s 125th birthday. CME’s equity index contracts include E-mini and Micro E-mini futures and options based on the Dow.
During the first five months of 2021, over 184,000 Dow E-mini futures contracts traded each day, on average. Micro E-mini Dow contracts traded an average of more than 159,000 contracts daily in Q1 2021, setting a quarterly record.
The Origins of the Dow Jones Index
The first futures contracts predated the Dow, but not by that long. In May 1896, Charles Dow, a Wall Street journalist, began calculating a daily average of 12 major, U.S.-based industrial stocks as a companion to the Dow Jones Transportation Average, which he introduced in 1884, according to S&P Dow Jones Indices. The basic idea was that an average of stock prices could serve as a barometer to help monitor broader market trends.
The original 12 Dow stocks read like a greatest hits list from the heavy industry era, with companies specializing in products or services related to coal, lead, sugar and tobacco. Most of the original 12 are long gone. Only General Electric is still around in some form (though GE was removed from the Dow in 2018).
Today, the Dow stocks still retain an industrial element – oil and gas producer Chevron, aerospace manufacturer Boeing and construction equipment maker Caterpillar, for example. But the Dow also leans heavily toward consumer technology, consumer products and financial services, with companies such as Apple, Intel, JPMorgan Chase, Nike and Salesforce.
With a combined market capitalization in excess of $8 trillion, the Dow can be viewed as a bellwether of the U.S. economy. But it’s also a “living thing,” Farmer said, with a wealth of historical data that can offer insight into market performance and the path of the economy.
“The Dow evolves,” Farmer said, noting that S&P Dow Jones Indices periodically reviews the Dow’s composition to make sure it accurately represents the “mega-cap” segment of U.S. equities. The interconnectedness of the global economy also plays a role in the Dow’s make-up, he said. “The Dow’s continued relevance is reflected by its evolving composition.”
Simplicity in Investing
The past two decades have generated a boom for investors and traders, in terms of ways they can invest beyond traditional stocks and bonds, including mutual funds, exchange-traded funds, futures contracts and, now, cryptocurrencies. There’s also more information than ever for investors and traders to absorb. How can the Dow remain relevant?
Part of the enduring appeal and utility of the Dow is its simplicity, Farmer said.
Equity indices generally have four different use cases, Farmer said. The initial use case, for the Dow and other indexes, was as a market indicator. From there, indices can serve as the basis for investment research and portfolio development, as well as a benchmark to judge performance of those portfolios.
More recently, a fourth use case came about: indices as the basis for investment products, such as futures contracts, and the Dow futures contract, as an index-based financial product, was one of the earliest of those innovations.
“That evolution… emerged as really one of the most important for investors,” Farmer said. “Index-based investing has really exploded in recent years, reflecting both academic and empirical evidence of the outperformance of passive vs. active management. And products such as Dow futures may allow for facilitated investment exposure in risk management."
The partnership with CME Group, the introduction of E-mini Dow futures and the expansion of that toolkit has been nothing but a net positive for investors of all stripes.
“Investors all over the world, many of whom have investment exposure to U.S. holdings, rely on key indicators like the Dow to manage risk and interpret investment performance,” Farmer said. “The Dow is visible in media and market data venues all over the world. When people ask about how the market did today, usually the response involves the Dow.”
Watch the full discussion between Tim McCourt and Jamie Farmer above.
OpenMarkets is an online magazine and blog focused on global markets and economic trends. It combines feature articles, news briefs and videos with contributions from leaders in business, finance, economics and politics in an interactive forum designed to foster conversation around the issues and ideas shaping our industry.
All examples are hypothetical interpretations of situations and are used for explanation purposes only. The views expressed in OpenMarkets articles reflect solely those of their respective authors and not necessarily those of CME Group or its affiliated institutions. OpenMarkets and the information herein should not be considered investment advice or the results of actual market experience.
Neither futures trading nor swaps trading are suitable for all investors, and each involves the risk of loss. Swaps trading should only be undertaken by investors who are Eligible Contract Participants (ECPs) within the meaning of Section 1a(18) of the Commodity Exchange Act. Futures and swaps each are leveraged investments and, because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for either a futures or swaps position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles and only a portion of those funds should be devoted to any one trade because traders cannot expect to profit on every trade.
BrokerTec Americas LLC (“BAL”) is a registered broker-dealer with the U.S. Securities and Exchange Commission, is a member of the Financial Industry Regulatory Authority, Inc. (www.FINRA.org), and is a member of the Securities Investor Protection Corporation (www.SIPC.org). BAL does not provide services to private or retail customers.
In the United Kingdom, BrokerTec Europe Limited is authorised and regulated by the Financial Conduct Authority.
CME Amsterdam B.V. is regulated in the Netherlands by the Dutch Authority for the Financial Markets (AFM) (www.AFM.nl).
CME Investment Firm B.V. is also incorporated in the Netherlands and regulated by the Dutch Authority for the Financial Markets (AFM), as well as the Central Bank of the Netherlands (DNB).
TriOptima AB is regulated by the Swedish Financial Supervisory Authority for the reception and transmission of orders in relation to one or more financial instruments. TriOptima AB is registered with the US National Futures Association as an introducing broker. TriOptima holds a permit under Section 49A of the Israeli Securities Law, however TriOptima’s operations are not subject to the supervision of the Israel Securities Authority. This permit does not constitute an opinion regarding the quality of the services rendered by the permit holder or the risks that such services entail. TriOptima’s services are designed exclusively for Qualified Investors in accordance with Israeli law. TriOptima AB materials are directed to Equivalent Counterparties and Professional Clients only and are not intended for Non-Professional Clients (as defined in the Swedish Securities Market Law (lag (2007:528) om värdepappersmarknaden)) or equivalent in a relevant jurisdiction.