They are very similar, yet very different. A closer look.
The S&P 500 and the Dow Jones Industrial Average are interchangeable to many investors. But they are different, and those differences matter, especially at key market inflection points. We could be nearing one, so it pays to take a closer look.
The chart below shows the past 20 years of returns of the S&P 500 and the Dow. Importantly, I have charted for you the 3-year annualized return, including dividends. That is, if you look at the far right side of the chart, the Dow has gained 16.65% per year for the past 3 years, while the S&P 500 has returned 14.03%.
There is a lot to break down here. First, the Dow and S&P 500 tend to closely match each others’ returns over long periods of time. So any time I notice a significant advantage for one over the other, I want to point it out to you. As the bottom section of the chart shows, the S&P 500 has under-performed the Dow by 2.6% a year over the past 3 years. Historically speaking, that is pretty high. In fact, it is the highest Dow out-performance of the S&P 500 since the late 1990s.
When does the S&P 500 beat the Dow ?
Generally, the S&P 500 tends to perform better than the Dow in earlier stages of bull markets, and when tech stocks perform much better than the overall market. That is because a small number of now-giant companies (FANG stocks, etc.) have helped make the S&P 500 a tech-heavy index. Conversely, tamer sectors such as Utilities and Basic Materials are much smaller portions of the S&P.
Neither index has what I would call a