How is the Dow Jones index different from the Nasdaq?

This article is authored by Yogesh Kansal, Cofounder and CMO, Appreciate.

There are so many instances where one comes across mentions of the Dow or the Nasdaq surging or falling. But, what do the Dow and the Nasdaq represent?

Here is a bird’s eye view of the two indices.

Overview of Dow

The Dow Jones Industrial Average is, perhaps, one of the most reputed market indices in the US. It is also one of the oldest as it was set up in 1896, and comprises the 30 blue-chip companies that trade on the New York Stock Exchange or Nasdaq. Naturally, the biggest names of the corporate world viz Apple, Microsoft, Coca-Cola, Nike and more find themselves on the Dow.

However, despite all the laurels that Dow has earned over the years, it, unfortunately, is not considered a trustworthy barometer of the market. This is because the Dow is a price-weighted index, and not a market-cap or value-weighted index. In the Dow, stocks with higher prices occupy more weight, and depending on their weight move the index trading price higher or lower. Stocks with lower trading prices naturally occupy lower weight on the Dow.

Having said that, it is indeed a moment of pride for companies to be included in the Dow. For instance, in February 2024, the Dow replaced Walgreens with Amazon.com. For Amazon, this was quite the feat, and market participants welcomed and applauded the inclusion given the expanding market share and increasing sales volume of the digital e-commerce company.

Further, investors ought to remember a small but very important factoid: The Dow is not the same as the Dow Jones and Company. The latter is a firm that owns News Corp and publishes The Wall Street Journal. The Dow is one of the many indices owned and governed by the company, S&P Down Jones Indices LLC.

Lastly, the term “industrial” included in the un-abbreviated name, “Dow Jones Industrial Average” was relevant during its early days, when Charles Dow invented it in 1896. Nowadays, the index mostly comprises big names in the corporate world. The Dow is not focused on including companies whose operations are tied to heavy industries.

Overview of Nasdaq

The reference to Nasdaq can often puzzle investors. This is because the term Nasdaq refers to stock exchange as well as to stock indices.

So, when one hears a market expert or a journalist speak about the Nasdaq falling or rising by XYZ points, it is a reference to the Nasdaq Composite Index. The Nasdaq Composite Index comprises 2,500 companies. Another quite popular index is the Nasdaq 100, which includes the 100 top non-financial publicly traded companies on the Nasdaq stock exchange.

The Nasdaq Composite is a tech and internet-heavy benchmark. However, other companies from the financial, consumer, bio-tech and industrial space are also included.

Compared to the Dow, the Nasdaq is quite young. It was established in 1971. Nasdaq is a market-cap-weighted index contrasted with Dow, which is a price-weighted index.

Differences between the Dow and the Nasdaq

• The Dow is an index. Its trading platform is the Nasdaq and NYSE. On the other hand, the Nasdaq is a stock exchange as well as an index. Several Nasdaq indices trade on the Nasdaq stock exchange.
• The Dow was founded in 1896. The Nasdaq was founded in 1971.
• While the Nasdaq is a tech-heavy index, the Dow is the index of 30 blue chip companies in the US. Its composition keeps on changing depending on the stock prices and the evolving market sentiment.
• The Dow is a price-weighted index, while the Nasdaq is a market-cap-weighted index.

Investing in Dow and Nasdaq

Indian investors looking to diversify their portfolios with exposure to US stocks can invest in ETFs that track the Dow and the Nasdaq. These ETFs can help the investor build wealth over the long run, while simultaneously allowing them to leverage the power of currency depreciation to boost portfolio returns.

ETFs that track the Dow

ETFs that track the Nasdaq

How the Indian investor can benefit?

Indian investors looking to diversify their portfolio can explore investing in overseas markets via the above-mentioned ETFs that track the Dow and the Nasdaq composite and Nasdaq 100. Investing via ETFs helps investors earn great returns without incurring the hefty expense ratios of mutual funds. Furthermore, the individual investor is spared the hours spent carrying out equity research and stock selection.

Disclaimer: The opinions expressed above are personal and may not reflect the views of DSIJ.