Index Education Comparing Iconic Indices: The S&P 500® and DJIA® Contributor INTRODUCTION Garrett Glawe, CFA The S&P 500 and Dow Jones Industrial Average® (DJIA), both of which are Managing Director Head of U.S. Equity Indices designed to track U.S. large-cap companies, are two of the most iconic [email protected] indices in the world. These indices have changed the way that investors measure the stock market and benchmark investment portfolios. They also serve as the basis for some of the world’s most successful index-linked products and derivative contracts. At the end of 2019, we estimate that there was over USD 11.2 trillion benchmarked to the S&P 500, which includes USD 4.6 trillion passively tracking the index. In comparison, there was USD 32 billion benchmarked to the DJIA, which includes USD 28 billion in passive assets.1 According to our estimates above, the S&P 500 won the battle to attract assets. However, the DJIA offers several advantages, including its simplicity and a longer live history—it celebrated its 125th anniversary on May 26, 2021. As discussed in past research,2 the trading volumes of investment products linked to the DJIA are high relative to the amount of assets tracking it. The S&P 500 and DJIA have similar long-term risk/return profiles, and their three-year rolling correlations are high. However, there are important differences between the two indices that investors should consider. • Number of constituents • Size of the component companies • Weighting scheme • Sector representation • Fundamentals • Factor exposures We will start by exploring areas in which these iconic indices are similar and then delve into the differences. 1 Source: S&P Dow Jones Indices LLC. Annual Survey of Assets. Dec. 31, 2019. 2 Lazzara, Craig, Sherifa Issifu, and Tim Edwards. “A Window on Index Liquidity: Volumes Linked to S&P DJI Indices.” S&P Dow Jones Indices LLC. Aug. 29, 2019. Register to receive our latest research, education, and commentary at on.spdji.com/SignUp. Comparing Iconic Indices: The S&P 500 and DJIA June 2021 LONG-TERM PERFORMANCE Exhibit 1 shows the long-term performance of the S&P 500 and the DJIA Both designed to track starting in 1990, with the indices rebased to 100 at the start of the period. U.S. large caps, the The chart uses daily data and the total return version of each index, which S&P 500 and DJIA are includes reinvested dividends. We can see a similar return pattern for the two of the most iconic indices in the world. S&P 500 and the DJIA. Exhibit 1: Historical Performance 3000 S&P 500 DJIA 2500 2000 1500 1000 Return Historically, the 500 S&P 500 and DJIA 0 have had a similar return pattern… 1/2/1990 6/4/2004 3/1/2000 1/4/2001 9/4/2008 3/7/2017 11/5/1990 5/20/1993 12/4/1995 6/19/1998 4/27/1999 5/18/2010 12/4/2012 4/29/2016 9/11/1991 7/16/1992 3/24/1994 1/30/1995 10/8/1996 8/13/1997 9/23/2002 7/30/2003 4/12/2005 2/15/2006 7/13/2009 3/23/2011 1/27/2012 8/18/2014 6/24/2015 1/10/2018 9/24/2019 7/30/2020 11/14/2001 10/29/2007 10/10/2013 11/14/2018 12/20/2006 Source: S&P Dow Jones Indices LLC. Data as of April 30, 2021. Index performance based on total return in USD. Past performance is no guarantee of future results. Chart is provided for illustrative purposes. Correlation Exhibit 2 shows the three-year rolling correlation between the S&P 500 and the DJIA, starting in 1993. The long-term average was 0.95, which is not surprising after reviewing Exhibit 1. We can see that the correlation dipped as low as 0.86 in 2001. However, since 2009 the correlation has almost always been above the long-term average of 0.95. Coupled with the similarity in historical performance, these correlation figures suggest the two indices typically reacted in similar ways to changing market environments. Exhibit 2: Three-Year Rolling Correlation …as well as a high 1.00 three-year rolling 0.98 correlation, with a long- Average = 0.95 0.96 term average correlation of 0.95. 0.94 0.92 0.90 0.88 Correlation 0.86 0.84 0.82 0.80 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1994 1995 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 1993 Source: S&P Dow Jones Indices LLC. Data as of April 30, 2021. Index performance based on total return in USD. Past performance is no guarantee of future results. Chart is provided for illustrative purposes. INDEX EDUCATION | Core 2 Comparing Iconic Indices: The S&P 500 and DJIA June 2021 Return and Volatility over Time Although the returns of the two indices have exhibited high correlation over time, their performance did diverge, sometimes substantially. Exhibit 3 Although the indices shows that the S&P 500 outperformed the DJIA by a wide margin over the exhibited high correlation over time, past one- and three-year horizons. However, over the past 30 years, the their performance DJIA outperformed slightly. sometimes diverged substantially. We can see that in the short term, the S&P 500 has experienced less volatility than the DJIA, but over the long term, the volatility numbers were quite similar. Exhibit 3: Return and Volatility Profile PERIOD S&P 500 DJIA DIFFERENCE ANNUALIZED TOTAL RETURNS 1-Year 45.98 42.12 3.86 3-Year 18.67 14.52 4.15 5-Year 17.42 16.48 0.94 10-Year 14.17 12.95 1.23 Over the one- and three-year horizons, the 20-Year 8.35 8.53 -0.18 S&P 500 significantly 30-Year 10.60 11.16 -0.56 outperformed the DJIA. ANNUALIZED VOLATILITY* 1-Year 14.52 16.00 -1.48 3-Year 18.52 18.81 -0.29 5-Year 14.99 15.52 -0.53 10-Year 13.63 13.74 -0.11 20-Year 14.81 14.61 0.20 30-Year 14.55 14.45 0.10 ANNUALIZED RETURN / VOLATILITY 1-Year 3.17 2.63 0.53 However, the DJIA outperformed slightly 3-Year 1.01 0.77 0.24 over the past 30 years. 5-Year 1.16 1.06 0.10 10-Year 1.04 0.94 0.10 20-Year 0.56 0.58 -0.02 30-Year 0.73 0.77 -0.04 * Volatility is defined as the standard deviation of monthly total returns. Source: S&P Dow Jones Indices LLC. Data as of April 30, 2021. Index performance based on total return in USD. Past performance is no guarantee of future results. Table is provided for illustrative purposes. INDEX EDUCATION | Core 3 Comparing Iconic Indices: The S&P 500 and DJIA June 2021 The two indices have Exhibit 4 highlights the three-year rolling annualized performance difference gone through cycles of between the S&P 500 and DJIA and clearly shows that the two indices relative performance, have gone through cycles of relative performance. The period from June specifically in the period from June 2000 to June 2000 to June 2003 is worth investigating, as it highlights the importance of 2003. the sector allocations of each index. On June 20, 2000, the three-year annualized returns for the S&P 500 and DJIA were 19.6% and 12.0%, respectively, resulting in a difference of 7.6%. At that time, the S&P 500 had a 33% weight to the Information Technology sector, whereas the DJIA had a weight of 20%. The next three years saw the tech bubble burst and the S&P 500 In June 2000, the S&P companies within the Information Technology sector lost 32%, annualized. 500 had a 7.6% higher By June 20, 2003, the DJIA (-2.25%) had weathered the storm much better three-year annualized than the S&P 500 (-11.00%), resulting in a difference of 8.75%. return than the DJIA and 13% higher weight Exhibit 4: Three-Year Annualized Relative Returns in the Information 10.00% Technology sector. 7.64% 8.00% 6.00% 4.00% 2.00% 0.00% -2.00% -4.00% (%) Returns Relative Annualized -6.00% The tech bubble burst -8.00% and by June 2003, the -8.75% DJIA (-2.25%) had -10.00% weathered the storm 1994 1996 1999 2001 2006 2008 2011 2013 2016 2018 2021 1995 1997 1998 2000 2002 2003 2004 2005 2007 2009 2010 2012 2014 2015 2017 2019 2020 1993 much better than the Source: S&P Dow Jones Indices LLC. Data as of April 30, 2021. Index performance based on total S&P 500 (-11.00%). return in USD. Past performance is no guarantee of future results. Chart is provided for illustrative purposes. INDEX EDUCATION | Core 4 Comparing Iconic Indices: The S&P 500 and DJIA June 2021 INDEX METHODOLOGIES There are some key There are some key differences between the construction of the S&P 500 differences between the and the DJIA that are important to be aware of. Exhibit 5 provides a construction of the S&P summary of each index’s methodology. 500 and DJIA that are important to note. The S&P 500 includes companies from all 11 Global Industry Classification ® Standard (GICS ) sectors. The DJIA excludes the Utilities sector and the Transportation industry group, which are covered by complementary indices.