From Derek Deer: “Why are spiders so much more popular than diamonds? (Today’s trading volume was at over a 10 to 1 ratio). Both have similar expense fees of .18%. The long term performance of both indexes (as well as the NASDAQ) are [sic] very similar. Does it have to do with distribution of dividends?”
A.T.: Two reasons, I would guess:
First, spiders (the nickname for a “stock” with the symbol SPY that basically gives you a tiny piece of all the stocks in the Standard & Poor’s 500 index) were invented first. The folks who wanted a way to trade the equivalent of an index fund took a liking to them, got used to them, and have no particular reason to switch.
Second, the S&P is a much broader, more sensibly calculated index than the Dow (which diamonds – symbol DIA – mimic). So for those who seek true market-weighting, spiders make more sense.
(The Dow is only 30 stocks compared with 500 for the S&P, so it’s less representative of “the market.” And it is calculated without regard to logic, which makes it less representative still. To make the point, imagine a day on which 28 of the 30 Dow stocks are unchanged, but two others move up and down $3 each. A $30 stock in the Dow rises $3, which is to say 10%, and a $100 stock in the Dow falls $3, which is to say just 3%. The 10% and 3% moves are considered equal – $3 is $3 – and the Dow, in this example, closes unchanged. It becomes all the less sensible if that $30 stock happened to have 2 billion shares outstanding, meaning that it had a $60 billion market capitalization that just gained $6 billion … and the $100 stock had just 100 million shares out, giving it a $10 billion market cap that just dropped $300 million. As far as the Dow Jones Industrial Average is concerned, it was a wash: the $300 million loss and $6 billion gain are considered equivalent. This is not to say the stupidity of the way the Dow is calculated doesn’t largely cancel itself out, or that Derek is wrong: The various indices do tend to move largely in tandem. Nor is it to knock Messrs. Dow and Jones, who would have been hard-pressed, sans pocket calculators let alone computers, to calculate it differently. But still.)
Quote of the Day
Wall Street takes your money and their experience and turns it into their money and your experience.~unknown
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