Talk Your Book: The People's Index

0:00Today's Animal Spirits Talk Your Book is brought to you by State Street Investment Management Go to statestreet.com slash investment dash management to learn more about their ETF for the People's Index, the Dow, ticker DIA. That's statestreet.com slash investment dash management for more information. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnick and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management.

0:35This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.

0:49Welcome to Animal Spirits with Michael and Ben. Michael, the DAO has been around since 1896, 1897, is that correct? I think it's 1896. So one of the weird things about the DAO is that it's a price weighted index. And we talked to Matt Bartolini from State Street today all about this. And I never thought to realize, like, why did they do it like this? And one of the reasons that they did it like this, Matt mentioned, and I kind of chat GPT'd it to make sure it made sense, is they didn't have the computing power to make these crazy indexes back in the day. and the staying power of this that it's i don't know fast approaching 130 it's 130 years or so being around they did a price index back then because it was the easiest way they could calculate it i never thought about that did you i don't know maybe maybe i don't know who could so the dow is not just what you hear on the news actually it's actually investable so state street has a Dow ETF, DIA, and it has, what, nearly$40 billion in assets in it?

1:54I think people refer to it as the diamonds. Okay. Do they? The diamond? I don't know. Did you just make that up? Nope. I think they did. All right. So Ben, there was 12 stocks in the original Dow in 1896. Can you name any of them? Are any of them still alive? You can name one of them. GE? Yes. Boom. Credit to you. Great job. American Cotton Oil Company, American Sugar Refining Company, American Tobacco Company, Chicago Gas Company, Distilling and Cattle Feeding Company, General Electric, Lackleed Gas Company, National Lead Company, North American Company, Tennessee Coal, Iron, and Railroad Company, U.S.

2:31Leather Company, and U.S. Rubber Company. See, that's why things were so boring back then. Listen to all those boring companies. Yeah, I mean, I would have paid more than four times earnings for those things. Are you kidding me? What, do they have like a 12 % dividend yield? All right. So we talked to Matt Bartolini from State Street all about the Dow and got into a bunch of other stuff, what's going on in the markets and what they're seeing. So here's our conversation with Matt.

2:54Matt, welcome back to Animal Skirts. Yeah, thanks for having me back. All right. Today we are talking about the People's Index, the oldest index, 1896? I think give or take. Yeah, that's when it was sort of first reported. We're talking about the Dow Jones Industrial Average. If you turn on TV, Kramer, whatever, newspaper, it is always the first thing. What did the Dow do today? It's kind of funny. I feel like the S &P 500 has taken the crown in many respects, but for Main Street, when they think about the stock market, they think about, or the question, they say, how did the Dow do? True? Yeah, 100 % true.

3:41My parents are like, oh, I heard the Dow was down 400 points today. What's happening? Yeah, nobody, civilians do not quote the S &P. It's always Dow. So we think of it, I think, as an index, and it is, but it is an unusual index. It still gives you broad diversification. It is the US stock market, but it is different than the S &P. So what is the Dow? How is it weighted? And how is it different than the market cap weighted index? Yeah. So it's 30 stocks selected by a committee grouped by S &P in the Wall Street Journal. And that's sort of how it's been throughout time. It has 30 stocks. It covers a broad range of sectors and industries.

4:24The selection criteria are for basically companies that have a strong reputation, sustained growth, really resonate with investors as well, but also make the plurality of their revenue within the US. So think of it as like US large cap, blue chip, well-known firms that are spread across different sectors of the US economy. And the weighting mechanism is price weighted. So a stock with the highest price will have the highest weighting. And there's controls in that and sort of the index design where the highest price stock cannot be 10 times greater than the lowest price. Okay. So there are some sort of caps on that.

5:07That makes sense. And what is the, how different does the sector weightings look than the S &P? I assume the biggest one would be, it's not nearly as tech heavy, but with 30 names, it's obviously still a concentrated index. Yeah, it is different than the S &P because the S &P is going to be market cap weighted. And when you have a high amount of concentration, you can start to have a high amount of concentration in sectors. And so if we look at it in the Dow Jones, the highest weighted sector is the financials with 26%. And if we look at the S &P 500, financials will make up around 13%. Within the S &P 500, 33 % is in tech.

5:42So it is a different level of sector classifications and sector allocations with something like the Dow Jones Industrial Average. It's kind of remarkable how the composition of the index really makes no sense. Like, why would you weight stocks by their price? It's an arbitrary measure of value, right? For example, McDonald's stock is$300, okay? and Walmart stock is$98. And that's it. That's not value. That's literally price. And yet, if you zoom out, so I'm looking at the max change since inception of the earliest inception of both of these ETFs, not the index of the ETFs, goes back to 1998. There's very little difference.

6:33Now, over shorter periods of time, particularly in the last three to five years, There's a decent amount of difference between tech stocks. But it's just wild that this index of 30 stocks that is weighted by, again, the price tends to track the market cap pretty closely. Yeah. I mean, I would agree. Price weighting is probably something that you would create in the 1800s, right? But it's still – It was probably just easier back then. They didn't have computers and stuff to calculate all this stuff. It was probably the simplest method they could come up with, right? It works. It does work. Yeah.

7:03It was, you put it in a table and I think it was the Atlantic Observer and then you average out the price and there you go, you get your index for the day over day over day. But there is some dynamicism to it because there is a divisor to control for those outliers where a stock, perhaps they have a stock split or there's never a corporate action event or a stock gets included at a different price than what is the top one now or the bottom one. So there is some dynamicism to it too because of that divisor to make it a little bit more sophisticated. But I also say like, you know, equal weighting.

7:34I know I talked about that in the last podcast with you guys. Like equal weighting sort of more generally accepted, but that's not really that novel either. It's just looking at the number of stocks, you know, fairly equal weighting them across the board. I would say the reason why the returns are similar, you're able to get a good barometer, the broad-based U.S. equity market economy is not so much on the weighting mechanism, but on the selection criteria, right? So if we go back to some of the core principles of what's being included, it is, you know, a company that has, you know, sustained growth, an excellent reputation, the share price is well controlled, and that the fact that the committee is looking for broad-based sector representation across the U.S.

8:15economy. You know, if you were to have a selection criteria that looked at unprofitable firms, firms that made no money, and you price weighted those, or if you market cap weighted those, the returns on those would be exactly the same because it ultimately comes down to what are the companies within the benchmark. The weighting will have an impact on, again, like you said, Michael, on those short time periods where all of a sudden tech rips. But over a long time horizon, being diversified across all segments of the broader economy can be helpful in sort of maintaining that market exposure. The long-term nature of these makes it so, yeah, the Dow and the S &P aren't nearly as off of each other as you wanted to think.

8:54But in the short run, it can diverge quite a bit. Like in 2023 and 2024, the Dow lagged. But in 2022, when the market was down, it outperformed by a pretty wide margin. Is that just – I'm trying to think of what factor style box they would fit in. Is that just because these are more high-quality kind of value dividend type of names? Is that the best way to describe it from a factor perspective? Yeah. So if we're going to look at it through a factor lens in their factor betas to value, quality, and momentum, historically, the Dow Jones Industrial Average is going to be of higher value. So, you know, or in this case, low value, but have more value attributes.

9:35So it's a value oriented approach. It'll be more slightly higher quality than the S &P 500, which is sort of hard to do these days, just given how much cash those Mag 7 stocks kick off, and lower volatility. And I think it just comes back to, and this is not a technical term, but the blue chippiness of these type of companies where they have a very durable business, a wide moat. They've been around for a significant period of time and have been able to weather different economic storms. And so in a period like 2022, these companies in their blue chip nature can perhaps ride out some of the adverse consequences result in the Federal Reserve tightening monetary policy so significantly.

10:17There are 30 stocks in this index, and these are the top 10. Goldman, Microsoft, Caterpillar, Home Depot, Visa, Sherwin-Williams, American Express, Amgen, McDonald's, and JP Morgan. When people think about constructing a portfolio and they ask the question, am I diversified? How many stocks do I need to be diversified? Well, as we keep mentioning, 30 stocks gets you, I don't know, pretty much all the way there, right? 30 stocks versus 500. Not a whole lot of a difference. How, talk to us about, because you mentioned that these are blue chip names, you think stability, you think durability, Coca-Cola has been in the index, I'm guessing, for a long time now.

11:01I would imagine that turnover in the Dow is significantly different than the S &P. Is there fewer turnover, fewer names coming in and out than the other index? Well, that's the interesting thing is that there actually is no set rebalancing schedule. So with the S &P 500, it rebalances, reconstitutes basically the third Friday of the last month of the quarter. So it's like September 18th. Next one we'll have, yeah, September 18th will be the Q3 one. With the Dow Jones index, there is no set rebalancing schedule. The committee will make decisions on whether a stock needs to be removed either because of price concerns.

11:42Perhaps the price goes well above an excess of what they would consider to be stable for inclusion. Or there's a corporate action. Or a company no longer has those attributes of an excellent reputation, sustained growth, and something that resonates with the investor. So the turnover profile will be very different. And so to that extent, this actually is a very much a buy and hold type of index where it's not constantly churning out the portfolio and rebalancing. I think that also speaks to some of the price weighting mechanism where it's, you know, it's a little bit of like set it and forget it.

12:15Do these companies, are these companies hesitant to do stock splits? Like, do they care if they're high weighting in the Dow? If Goldman decided to do a two-for-one stock split for whatever reason, I mean, it doesn't really matter anymore because you can buy fractional shares. but companies still do stock splits, obviously. Is it rare for a Dow stock to do that? I cannot remember which company it was, and I don't want to use the wrong name, but there are companies that you look at and they do a stock split. And ultimately, stock splits don't make too much sense from a financial perspective. And it is to get into the Dow.

12:50There's a lot of fanfare being included in the Dow Jones. Even if you look at some of the top brands, you know, go to - Did Amazon do that? I think, yeah. So I think it was Amazon. I didn't want to say it was Amazon. Yeah, they had like a thousand dollar price. Yeah, that's right. Yeah. And so that all of a sudden becomes really exclusive club, 30 stocks. It's not a lot that you can get into. And you can bandy about that to your end investors that you're one of the large companies, blue chips in the Dow. And if you look at some of the global brands, Forbes puts out that list. I think the Dow Jones Index has 10 out of the top 50.

13:26I mean, you could walk down, you know, I think some of those names that you rattled off earlier, Michael, I think I even used them in my day today so far. It's only, you know, not even lunchtime. You know what's probably coming out, which is sort of neither here nor there, but I'm guessing UnitedHealth doesn't fit the criteria of a blue chip name, which is sort of whatever besides the point. But anyway, so this is not just an index that people talk about. This is also very much an index that people invest in. So you all have an ETF that tracks us. I would say the ETF that tracks us. The ticker is DIA, and it's got$38 billion in here.

14:13And I mean, that's a huge number. I know with ETFs, it's weird, but like, do you have any sense of who's allocating here? I'm sure the answer is everyone. Anyone? This has got to be a baby boomer ETF, correct? Is that stereotyping? I would probably put it to a demographic lens. I would probably say it is very much the sizable retail community using it. Now, that retail community probably skews to the older generation. So I think to that respect, you're accurate. But this ETF is actually a microcosm of all the different user bases of ETFs. because DIA has a decent amount of options liquidity and there's a relevant futures contract that offsets it.

14:59So you actually see this traded a lot in some of the structured product vehicles as well as in some of the more Delta One systems. So you have your wealth advisory, you have retail, you have institutions. So it's actually a pretty decent ecosystem of user base here. But I think when we look at the 13Fs, there's a lot of unreported shares, which when we look at that, that says to me, it is a decent amount of retail participation because retail investors do not need to divulge or disclose their ownership of ETFs. Well, think about it this way. If you want exposure to the US stock market, but you don't want to have 35 % of your portfolio or whatever the number is in the top seven names, there's not a bad way to get exposure.

15:45Yeah. And I think, you know, every day you're also, you're getting a readout of the scorecard from the local news. They always report out on what the Dow is doing. And it has this sort of cultural resonance of like, yeah, I own the Dow Jones Index. I have a piece of my portfolio in there. These are 30 blue chip stocks, you know, brand names that everyone knows, Coca-Cola to, you know, JP Morgan to Goldman Sachs to Apple, Amazon. And that's the other thing is, you know, a lot of people maybe look at this and like, oh, that's my grandfather's index. That's an older index. It's not really, it has a hard time keeping up with the times, you know, but if you look at it, it has four out of the seven back seven.

16:22You know, it has Apple, it has Amazon, it has Apple and Microsoft. You mentioned the blue chippiness, which I think I mentioned that you mentioned already. So apologies. But the American exceptionalism has been a theme in 2025. Is it the end or not? But what does the revenue exposure look like for the Dow versus the S &P? Yeah. And when we break it out by the revenue derived by country, right now it skews about 65 % to 66 % derived in the U.S. for Dow Jones. So about two-thirds of the revenue of Dow Jones companies is generated within the confines of the U.S. If we look at the S &P 500, that number is around 57%.

17:12So on balance, they're roughly the same. There's some marginal difference. The one thing that I would say is for the Dow Jones, again, there are rules. I think a lot of folks are sort of like, oh, it's a price-weighted index. But there's actually more rules to it. One of the rules is that a company has to be headquartered in the US. And that also the majority, this is plurality. It's a very hard word for someone like me to say, plurality. But I'll say a majority of revenues should be derived from the US. So there are some constraints there that actually make this more US natured than, say, the S &P 500, which has some of those constraints on US domicile.

17:53Not comparing or contrasting that one is better than the other. But if I look at these companies, there are blue chips that operate in the US that drive a lot of the revenue from the US. So it is a very more US centric portfolio, all else equal. So you mentioned that there's a rule that between the top and bottom holding, there has to be a certain relationship. Is there a limit on the size of the biggest stock in the index? Can you not get over 10 % or something like that? Oh, in terms of the overall weighting? Yeah. Is there a ceiling on how big a stock can get in the index? Not in the index methodology.

18:26There isn't. I think because of that 10x multiplier, it really depends upon what you're putting in there on the bottom. Because all of a sudden, that can really change the math quickly. If, say, a company hits on all the other criteria in terms of the sustained growth, excellent reputation, and they have a$5 share price, that all of a sudden becomes extremely hard to have something like Amazon or Goldman in there, which have much higher share prices. You mentioned the 10X multiplier twice, but could you expand on that? Because I see Goldman at$723 and Verizon at$42. And I won't do the math at the top of my head lest I embarrass myself, but that's more than$10.

19:05Yeah. So in the rules, the index committee monitors whether the highest priced stock in the index has a price more than 10 times that of the lowest. So it's something they're monitoring. It's not a hard and fast rule that all of a sudden it kicks it off. And a lot of that comes in through the index inclusion of it because it sort of has a governor, if you will, on including the highest of high priced stocks. Again, going back to our Amazon example where they did the stock split. This is sort of in the weeds and not really relevant for anything other than my own curiosity. But if you add up the 30 stocks, just the price, that doesn't get you to the price of the index, right?

19:44No, they have a very dynamic divisor that will - Like each individual name does or the index itself? The broader index, when you divide it back, instead of just doing it in a market cap weighted fashion, right? If you were to take the market cap of Apple and divide it by the full market capitalization of the index, you get Apple's weight. And here, they're taking the price of Apple and dividing it by this divisor to then give you the associated weight that would give a normalized price weighted basis. So it could be tracked over time. And that's the dynamic nature of the divisor. So it's actually what is sort of billed as maybe basic price weighted.

20:22There's actually a lot of sophistication that goes into it. Well, I always say that the S &P 500 is the biggest, the world's largest momentum strategy. And I know it's not momentum in the quant sense of the term, but it's you let your winners ride. And I guess being price weighted, the Dow kind of does that too, right? Yeah, to some extent. I mean, without the sort of attention towards the value of that price, meaning the market capitalization. So yeah, the higher price stocks, they're going to be higher weighted, but they might not be the best performing either. Because if one stock goes from 100 to 50, that's a 50 % decline in value.

21:01If the$500 stock drivers play at 50 points, that's not going to be as much. That makes sense. So Matt, when you talk to either advisors or retail or institutional investors, whoever the end user is, how do they tell you that they're using this within their overall asset allocation? Yeah. So it sort of stretches the gamut on this. When we have conversations across different retail platforms, we'll have a conversation about education and investing education. and about if you have that first$1 ,000 that you want to put to work, how could you do it in a very diversified fashion in companies that you would uniquely know?

21:40You can walk down the street, you could probably see 10 out of the 30 stocks just on Main Street in the USA. So something like DIA and the Dow Jones Index, that's something that a very early investor can invest in and have their capital potentially grow over time, given the long-term buy and hold nature of it. So I think it has an entry point to investing because you are diversified. You do have that balance across different economic sectors. And it's also pretty easy to understand. It's 30 well-known stocks, price-weighted. It's nothing too sophisticated. Obviously, you get into the weeds, you start to peel back the onion a bit, and you get to some hard math.

22:17So there's that entry point. But also, we think about in a broader context for, say, large wealth platforms that are building those asset allocation models. You obviously have this idea of core and satellite. Now, something like the S &P 500, very, very broad based, 500 stocks, you're going to mix it up with international and developed, have all this sort of robust asset allocation. The Dow Jones is probably not going to be your core, your one and done core investment, but I think it's something that could be added to a portfolio to give you a different approach to US equities and where you do have some overlap, but you're going to have more stability from a company profile.

22:56You are going to have a lesser volatility historically, not significantly less, but you can raise up some of the quality profile, that blue chippiness, as we were talking about earlier, to your portfolio and have it as a bolt-on to something that is more broad-based, that has maybe 1 ,000 stocks or 500 stocks. So we see it playing out that way. I've heard real estate investors before say they like investing in real estate as opposed to stocks because it's tangible. It's something that they know and can see. And I guess that makes sense why more retail investors would be invested in this because it's something they hear on the news.

23:28It's something they're comfortable with. In terms of an entry point, that's a good point you made that this is something people have heard people talk on the news about. It shows up in every ticker you see. And the companies, when you see the list, you know them all. So I guess from a comfort standpoint, that actually makes sense for why people would be comfortable investing in something like this. Yeah. I mean, it's like one of the oldest investing adages, Peter Lynch was know what you own. And a lot of these companies are very, very well known. And I think that really resonates with a lot of investors, but more importantly, those that are really new to building wealth and accumulating capital over time.

24:09If we had to put all of our money in just one DAO component, I'm just kidding. So Matt, I was talking with Ben earlier this morning about the year that is, 2025. And I don't know how to quantify this because we tried a few different ways and it didn't go well. But the market is up 9 % year to date, give or take. Talking about the SP here, so forgive me. But we are more than halfway through the year and it seems like a miracle given all the tumult, the headlines, the anxiety, the investor sentiment, maybe that's a good way to measure it. How do you think about 2025 year to date? I think it is a market of many subplots that have just been woven together and ended up landing the plane, so to speak.

25:02So all of the macro noise was very short-term in nature in terms of the trade policy, like the actual most onerous ones. And ultimately, it just comes back to the fundamentals. And we're up 9%. I think largely, that's probably where earnings per share growth on a full year basis is going to net out. So essentially, the market's up what earnings is essentially saying they should be from an earnings growth perspective. It's like that old adage of, in the short term, the market's a voting machine, but the long term, the market's a weighing machine. And I think that's kind of playing out a little bit in this year, where absent of those periods where we get fundamental data, the market only has macro to rely on for direction.

25:44And if you're only relying on macro, it's just chaotic, it's frenetic. There's just too many headlines to keep track of. But when the fundamental all of a sudden gets the hand of the steering wheel, it gets a little bit calmer because the fundamental news on balance has actually been pretty positive in terms of earning for share growth, company beats. So I'd say it's the dichotomy between macro noise and fundamental stability. And it really wrecks havoc on a day-over-day basis when one has more control over the other. That's a good point because we try to build all these macro narratives. And then the way to really see if they're happening or not is through the earnings, right?