Hi Johni,
Thanks for your points.
You are half right and half wrong.
To be exact, Dow Jones is "price weighted", not Cap-weighted as I said, i.e., the higher priced stocks have more impact on the Dow Jones than lower priced stocks.
It is certainly not "equal weighted". Equal weighted would mean that each stock has the same weight as every other stock.
Cap weighted indices have stocks which have the highest capitalization have a greater impact than lower capitalization stocks. SP500 and Nasdaq are cap-weighted. The correlation between the SP500 and the Dow Jones is, however, very high, despite one being price weighted and one being cap weighted, and one having 500 stocks and the other only 30 stocks.
Price weighted and cap weighted are different - although the effects could be similar.
The highest priced stock in the Dow Jones is United Health with a price ~$500 and has a weight of 8.6. Microsoft is the second highest priced stock ~$400 and has a weight of ~7.
The lowest priced stock in the Dow is Intel with a price of ~$34.2 and a weight of ~0.6.
So a change in Microsoft, for example, a much greater the effect on the Dow as a change in INTEL.
Despite the Dow Jones and SP500 have different methods of calculation (price weighted v cap weighted) and having very different numbers of stocks, Dow - 30 stocks, Sp500 - 500 stocks, their correlation is incredibly close. On a month by month basis, the correlation is about 0.94. That's almost perfect.
If you know anything about statistics, you'd know that a correlation of around 0.8 is a very high correlation.
Here's a chart comparing Dow with SP500 over 30 years:
In Australia, XJO is cap weighted. If you want to look at an equal weight index - you can go to MVW, Vaneck's equal weighted ETF:
Here's the XJO:
Interesting to compare the two.
From 24 February to the end of March, XJO rose +8.04%. MVW rose 10.96%.
Since the end of March, XJO has fallen -5.28%. MVW has fallen -4.89%.
I'd have to think that these difference add up to big dollars over time.
Good luck
RB
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