The Dow Jones industrial average doesn’t usually take much heat for the strange way it weights stocks, but Friday is proving to a big exception because of International Business Machines Corp.
Big Blue tumbled 7 per cent in mid-morning trading after reporting quarterly results that missed expectations for the first time since 2005, according to Bloomberg. Sales fell 2.3 per cent, showing that the company is having a tough time growing.
IBM’s woes didn’t affect the S&P 500, which was up nearly 11 points or 0.7 per cent. But the Dow was down 9 points.
The reason for the difference? The Dow weights stocks based on share price, rather than market capitalization, and IBM shares traded above $200 (U.S.) before Friday’s meltdown – giving them a lot of heft within the 30-member index.
For most investors, this isn’t a big deal. Anyone who tracks an index through an index fund or an exchange-traded fund tends to use the broader S&P 500 as a benchmark. The popular SPDR S&P 500 ETF Trust has net assets of about $129-billion – or more than 10-times the size of the comparable SPDR Dow Jones Industrial Average ETF Trust.
No wonder so many observers moan and groan when the Dow hits a record high. As IBM has demonstrated on Friday, the index as a broad measure of the U.S. equity market is relatively meaningless.