from NY POST
DOW GETS TECH MAKOVER
By BETH PISKORA
The introduction of Microsoft and Intel to the
Dow Jones industrial average, starting tomorrow,
could be the death knell of the S&P 500 index for
investors.
Here's why: Dow Jones & Co., which owns the
Dow Jones industrial average, just started
allowing mutual funds to create portfolios linked to
its performance last year. Previously, investors
seeking to mimic the market's returns were forced
to use an S&P 500 fund.
The updating of the Dow will make even more
mutual fund companies interested in creating
Dow-indexed products, since it's much less
expensive to buy and hold 30 stocks in a portfolio
than 500. Index fund investors are always looking
for the lowest expenses possible.
"For long-term investors, there will be little
difference in overall portfolio returns," said Ken
Fuller, a vice president at T. Rowe Price. "Over
longer periods - say 10, 20 or 30 years - the
Dow and the S&P track very closely, with the
wide variances only in shorter term periods. So
the question investors will be asking themselves is
whether they can get away with just buying the
Dow 30 to make market returns."
Also, as investors turn increasingly to direct
purchases of stocks - rather than owning equities
through mutual funds - they have the ability to
create a portfolio that tracks the index with only
30 stocks instead of 500.
Better yet, they can pick only the winners - just
like Dow Jones & Co. did when it changed the
index. Look at the 10-year returns of the new
members of the Dow, compared to those for the
companies that are being kicked out.
Microsoft is up 7,395 percent, while Intel is up
3,409 percent. Home Depot has a gain of 2,510
percent, and SBC Communications is up 358
percent.
By contrast, Union Carbide posted a return of
824 percent, and Sears got 335 percent. Chevron
is up 281 percent, and Goodyear Tire is up only
179 percent.
Depite the wide use of the Dow in calculating
market gains, the S&P 500 index is the
benchmark that almost all investors use to
compare the rates of return of their own
portfolios.
In addition to Microsoft and Intel, the other new
Blue Chips are SBC Communications and Home
Depot. They replace Sears, Chevron, Union
Carbide and Goodyear.
"It's a reflection of the Dow wanting to be more
aligned with the U.S. economy," said Christopher
Galvin, an analyst with Hambrecht & Quist.
By adding technology bellwethers like Microsoft
and Intel, the Dow finally recognizes how
important technology is to the U.S. economy.
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