By James Glassman

About the author: James Glassman is a senior fellow at the American Enterprise Institute. He is a former undersecretary of state and a co-author of Dow 36,000.

The Dow Jones Industrial Average is a marvel.

Unlike the S&P 500 index, which is simply a computerized weighted average of the largest stocks, the Dow is composed by actual humans and weirdly weighted according to stock prices. But it all seems to have worked. From 1992 to 2024, the Dow and the S&P returned almost exactly the same: a yearly average of 11.5% for the Dow and 11.3% for the S&P, with similar levels of volatility.

Lately, however, the Dow has trailed badly. The S&P has beaten the Dow in five of the last six years, returning better than one-third more.

Still, I love the Dow. I co-authored a whole book about it. The Dow is supposed to be a more qualitative reflection of the nation's economy than the S&P 500. In a world increasingly determined by numbers and algorithms, the Dow injects some humanity into the daily market action, reflecting a more holistic picture of the market.

But I'm convinced that the five-person committee that decides the 30 components needs to be more farsighted, looking not just at where the economy stands now but also where it is going. The committee had to play catch-up with tech stocks, and index investors may be missing the next big economic developments, too.

"Stock selection for the Dow is not governed by a strict set of rules," says S&P Global, which owns both the Dow and the S&P 500. The five component pickers focus on "an eligible company's reputation, its history of sustained growth, its interest to investors, and its sector representation of the broader market."

These vague guidelines give committee members wide latitude. We'll see what they do with their next choice, which should be coming soon. Honeywell International announced earlier this year that it intends to divide into three separate companies, much like General Electric, another Dow stock that was dropped.

Honeywell joined the Dow in 2020. Removing it after just a few years would be unusual but not unprecedented. Walgreens Boots Alliance was shown the door last year after replacing GE on the Dow in 2018. Raytheon, also in the Dow Class of 2020, was replaced after just four months. Honeywell was an odd choice to start with -- a stodgy industrial business, hardly of great "interest to investors."

So, if Honeywell is dropped, what stock would replace it?

I have several candidates. Start with healthcare. The departure of Walgreens left the Dow with four stocks in the category, including an insurance company. That might seem like a lot, but health spending currently represents 17% of the U.S. economy, which, on a strictly mathematical basis, would merit five Dow components. But 17% won't be a static proportion. As the world gets older and richer, healthcare will grow more important.

Furthermore, current healthcare components are overly concentrated. What the Dow lacks is a technology-oriented, diversified healthcare business. Enter Abbott Laboratories, a company older even than the Dow Jones Industrial Average. Abbott has four divisions: medical devices, nutrition, diagnostics, and generic pharmaceuticals. All are growing fast, and Abbott's sales last year rose 9.6%.

Abbott is a globalized company with about 60% of its revenue generated abroad. With products like Ensure and glucose-monitoring systems, it is more consumer-oriented than Dow components Merck and Amgen. And it certainly fits the "history of sustained growth" metric: Abbott has 53 consecutive years of dividend increases.

Incredibly enough, after dropping Exxon Mobil, the seventh-largest U.S. company by revenue, in 2020, the Dow has only one energy stock, Chevron. As a proportion of energy's role in the economy, the index should have at least two, and, as we look to the future, even that sounds minimal.

Perhaps the Dow needs a company that generates and distributes electricity, whose use is rising sharply with demand from data centers, electric vehicles, and factory modernization. The largest utility by market capitalization, NextEra Energy, with 91,000 miles of transmission lines and six million customers in fast-growing Florida, is a good choice. So is a smaller company, Baltimore-based Constellation Energy, whose shares are up more than 400% in five years.

The Dow has made 59 changes to its components since its inception in 1896. We can't be sure when, or even if, Honeywell will be dropped, but the list has been altered on eight occasions in just the past 10 years. Let's hope the next change will be more long-lasting.

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April 04, 2025 12:42 ET (16:42 GMT)

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