The End of The Dow Jones Industrial Average?

by on August 24, 2009 | ETFs Mentioned:

Dow Jones & Co. has begun searching for potential buyers of its stock-market indexing unit, which includes the widely-reported Dow Jones Industrial Average. The unit of Dow Jones, which publishes the Wall Street Journal and was purchased by News Corporation in late 2007, creates and licenses indexes for use by ETFs, mutual funds, and other products. In addition to the storied DJIA, the Dow Jones indexing unit is responsible for the creation and oversight of:

  • Dow Jones U.S. Select REIT Index: Tracked by RWRNew York Stock Exchange
  • Dow Jones Global ex-U.S. Select Real Estate Securities Index: Tracked by RWX
  • DowJones-UBS Commodity Index Total Return: Tracked by DJP
  • Dow Jones Islamic Market International Titans 100 IndexSM: Tracked by JVS

According to the Wall Street Journal’s Dennis Berman and Jeffrey McCracken, MSCI Inc., a former unit of Morgan Stanley, is one of the leading contenders to purchase the indexing unit. MSCI maintains dozens of indexes, and is perhaps best known for its line of European and emerging markets benchmarks, a number of which are tracked by iShares ETF products.

The name of the Dow Jones Industrial Average is unlikely to change following any transaction. Given its broad name recognition, it would be unlikely that a buyer would rebrand the index. Moreover, there are reports that any deal would require that the Dow Jones name remain. The impact on the ETF world would be largely cosmetic – funds tracking Dow Jones benchmarks would require a name change, but it is unlikely that an acquirer would shuffle holdings of any major indexes prior to regular rebalancing dates.

The Dow Jones Industrial Average was introduced in 1896 by Charles Dow, and has since become the world’s best-known stock market indicator despite some serious flaws that impact its ability to accurately reflect broad market movements. The DJIA is a price-weighted index, meaning that it is influenced more heavily by companies with higher share prices (an arguably arbitrary metric, given the ability of companies to split and reverse split shares). Second, the benchmark is comprised of only 30 individual securities, meaning the benchmark lacks sufficient diversification, particularly to small- and mid-cap companies.

Disclosure: No positions at time of writing.