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The Dow and the World Around It

Update: Tesla’s Standing in the S&P 500 ESG Index

Something New with Something Old: DIY DJIA®

How Now The Dow?

The S&P Europe 350 ESG Index – The European Benchmark for ESG-Focused Investors

The Dow and the World Around It

Only one index has endured through half of American history. Explore the historic path of the original index icon.


To learn more about the history of the DJIA and to celebrate its 125th anniversary, please visit:

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Update: Tesla’s Standing in the S&P 500 ESG Index

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Daniel Perrone

Former Director and Head of Operations, ESG Indices

S&P Dow Jones Indices

As discussed in my previous blog, Tesla would not be an immediate addition to the S&P 500® ESG Index following its addition to the S&P 500 on Dec. 21, 2020. Instead, the ever-popular automaker would have to wait until the next annual rebalance of the index. This rebalance finally took place, and as of May 1 , 2021, Tesla officially became a constituent of the S&P 500 ESG Index. Tesla’s inclusion begs two questions: how did we get here, and what does it mean?

Tesla’s entry into the S&P 500 ESG Index could be due to the index methodology as much as Tesla’s own improvement from a sustainability perspective. Tesla’s S&P DJI ESG Score was 22 out of 100 (up 8 points from last year’s score), driven by its ESG Dimension Scores, including an Environmental score of 28 (up 1 point), a Social score of 6 (up 2 points), and a Governance score of 49 (up 21 points). Though there are numerous factors at play with regards to Tesla’s final score, such as the ESG performance of its industry competitors globally, with this rebalance, Tesla’s standing among its industry group peers in the S&P 500 improved from the last rebalance (if it had been in the S&P 500 last year).

The automaker is not reviewed in a vacuum, however. Where it stands relative to its peers matters. The selection process for the S&P 500 ESG Index is performed on a GICS® industry group basis. As of the rebalancing reference date, Tesla was ranked fifth out of five companies in the Automobiles & Components industry group of the S&P 500.

Why would the worst-ranked company in a particular industry group be selected as a constituent? The S&P DJI ESG Score is only one component of the selection process. There is also a market capitalization element applied, which is designed to keep the GICS industry group weights of the S&P 500 ESG Index similar to the S&P 500.1

As shown in Exhibit 1, selecting the top four companies in the industry group results in only 25% of the industry group FMC being selected. By selecting Tesla, 100% of the industry group’s FMC is selected, which is closer to the target 75% FMC than if the company were not selected (a critical component of the selection methodology). This means that Tesla’s size, more than its sustainability performance, was the main driver in its inclusion.

So, what is a relatively low-scoring company doing in an ESG index anyway? The answer lies in the objective of the S&P 500 ESG Index to be a broad-based index that measures the performance of the securities from the S&P 500 that meet sustainability criteria , while maintaining similar overall industry group weights as the S&P 500. This is achieved by targeting 75% of the FMC of each industry group. The addition of Tesla, however, does not drastically shift the active industry group weights between the S&P 500 ESG Index and the S&P 500 (see Exhibit 2).

Furthermore, in a broad-market ESG index such as the S&P 500 ESG Index, lower-scoring companies do tend to be included, mainly to provide that broad exposure.

What does this mean for the future of Tesla in the S&P 500 ESG Index? Its current size does not ensure it will stay a constituent in the index in perpetuity—the company must still pass the minimum ESG score threshold eligibility criterion2 at each annual rebalance, and of course must not become involved in controversial weapons, tobacco, or thermal coal. The company must also remain in good standing with the UN Global Compact.

Tesla’s size could have significant implications on the ongoing status of its industry peers if the company’s ESG score continues to increase. It’s impossible to say how Tesla’s ESG score will change in the future, though their commitment to no longer accept Bitcoin as payment for environmentally focused reasons has been a big story in ESG circles. For now, questions about Tesla’s standing in the S&P 500 ESG Index have been answered.

1 For more details on the selection methodology, please reference the S&P 500 ESG Index Methodology.

2 Companies with an S&P DJI ESG Score that falls within the worst 25% of ESG scores from each global GICS industry group are excluded from the index, as per the


The posts on this blog are opinions, not advice. Please read our Disclaimers.

Something New with Something Old: DIY DJIA®

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Tim Edwards

Managing Director, Index Investment Strategy

S&P Dow Jones Indices

The growth of index funds has, in the main, helped to lower the costs and improve the performance of the average investor’s portfolio. Now, some are seeking to improve upon even the relatively low costs of conventional index funds via so-called “direct indexing”, by which investors purchase securities to match an index themselves, disintermediating the middlemen entirely. In fact, directly constructing a market-tracking portfolio might be easier than you think, and the concept is almost certainly much older than you realize.

Spoiler alert: this is really a post about replicating the 125-year old Dow Jones Industrial Average® near-perfectly, with a little more than $5,000. But, first, let’s consider replicating three possible benchmarks for U.S. equities, ordered by their increasing breadth: the S&P 500®, the S&P Composite 1500®, and the S&P U.S. Total Market Index (TMI).

In practice, an investment manager tracking any of these indices—particularly the S&P TMI—will likely only approximate the index’s holdings. Indeed, doing so while still delivering benchmark-like returns is one of the central skills of passive portfolio management. To illustrate, consider just two conditions that might be applied:

1. If a security is in the index, we must hold a non-zero position in that security.

2. Each position must consist of a whole number of shares.

Conditions 1 and 2 effectively set a minimum size on the portfolio: if we need 1% weight in a stock priced at $100, for example, we need a portfolio of a least $10,000 (equal to the price, divided by the weight). Ranging across all constituents, the largest price-to-weight ratio gives us an indication of how large a portfolio must be to replicate the index fully. Based on this simple calculation, Exhibit 1 displays the minimum portfolio size to replicate each index, assuming that the stock with the highest ratio of price-to-weight has an allocation of exactly one share, and every other constituent is allocated the whole number of shares closest to the target weight. We also report the active share of the resulting portfolio versus its benchmark.

In this simplified estimation, around $10 million would seem a reasonable starting point for an index-tracking portfolio for the S&P 500 or the S&P Composite 1500. For the S&P TMI, considerably more might be needed.

But what about the Dow Jones Industrial Average? By construction, the index comprises a representative set of 30 names designed to reflect the overall U.S. market, so we already start with a handily modest number of positions. And it has another helpful property: because the DJIA is price weighted, the ratio of price-to-weight is the same for every stock!

In other words, there is a simple way to build a portfolio that meets conditions 1 and 2: buy exactly one share in each constituent. That would (as of May 21, 2021) require a grand total of only $5,180. And even better, ignoring any trading costs or rebalances, this portfolio will, by definition, exactly match the performance of the benchmark.

“Direct indexing,” perhaps using fractional shares and perhaps also employing the full capabilities of an expert portfolio manager, is an exciting new frontier in passive investing. But as the venerable Dow approaches its 125th anniversary, it may still have a role to play at the frontiers in making disciplined, diversified investing available at a lower cost for everyone.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

How Now The Dow?

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Hamish Preston

Head of U.S. Equities

S&P Dow Jones Indices

The Dow Jones Industrial Average® (DJIA) will celebrate its quasquicentennial on Wednesday, which marks exactly 125 years since the index’s first publication. Before one of the world’s most watched and widely cited benchmarks hits this milestone, here is an overview of “The Dow®,” including its origins, what has stayed the same over the years, and what hasn’t.

Not the First Index to Measure the U.S. Equity Market… But Not Far Off!

Although many believe the DJIA is the first index to measure the U.S. equity market, that distinction actually goes to the Dow Jones Railroad Average. Charles Dow & Edward Jones began publishing the Railroad Average in 1884, and its composition reflected the importance of railroads to the U.S. economy—9 of the index’s 11 constituents were railroads, with Western Union and the Pacific Mail Steamship Company completing the set.

Although the Railroad Average (now known as the Dow Jones Transportation Average) reflected the major drivers of the U.S. economy at the end of the 19th century, Charles Dow thought that industrial companies would be crucial contributors to U.S. economic growth. Hence, the DJIA was born on May 26, 1896, as a way to track trends in the U.S. market. It initially contained 12 stocks, expanded to 20 stocks in 1916, and increased to the now familiar stock count of 30 in 1928.

Capturing Sectoral Trends in the U.S. Market

Charles Dow’s view about industrial companies proved correct as manufacturing achieved greater prominence in U.S. equity markets: manufacturing companies accounted for more than 50% of the U.S. equity market in 1950. The DJIA’s composition evolved to reflect this trend, as several manufacturers were added to the index by the middle of the 20th century. More recently, the DJIA captured the increased importance of Information Technology companies, which currently account for around 21% of the DJIA’s weight.

The index’s ability to capture sectoral trends is not surprising since it is designed to measure the market and so seeks to offer suitable sector representation, although the Transportation industry group and the Utilities sector are excluded as these companies have their own Dow Jones Averages.

No Set Quantitative Rules, But a Few Updates along the Way

The DJIA’s stock selection is not governed by quantitative rules. Instead, the Averages Committee makes constituent changes on an as-needed basis. Stocks are typically added only if the company has an excellent reputation, demonstrates sustained growth, and is of interest to a large number of investors. Eligible companies must be incorporated and headquartered in the U.S., and most of their revenues should come from the U.S. as well.

The resulting DJIA index levels offer a glimpse into U.S. equity market trends over the past 125 years. Such a lengthy history can be extremely useful for contextualizing today’s market movements, especially as it allows for comparisons across a range of market environments.

The DJIA has served as one of the preeminent gauges of the U.S. equity market for the past 125 years. Its history makes it especially useful for those looking to contextualize the market’s movements. Hence, at least some market participants may find themselves asking the question, “how now The Dow?”

The posts on this blog are opinions, not advice. Please read our Disclaimers.

The S&P Europe 350 ESG Index – The European Benchmark for ESG-Focused Investors

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Jaspreet Duhra

Managing Director, Global Head of Sustainability Indices

S&P Dow Jones Indices

The S&P ESG Index Series is aimed toward those who are looking to incorporate environmental, social, and governance (ESG) considerations into their investment products. These indices seek to provide similar overall industry group weights as their underlying index while simultaneously offering an enhanced ESG profile.

Within the European equities market, the S&P Europe 350 ESG Index is designed to measure the constituents that meet sustainability criteria from the headline S&P Europe 350®, which tracks 16 major European markets and covers approximately 70% of the region’s market capitalization. The S&P Europe 350 ESG Index is a unique strategy, designed for the ESG-conscious investor seeking broad market exposure in Europe through an index that is efficient to replicate.

How Is the S&P Europe 350 ESG Index Constructed?

The first step is to apply exclusions focused on business activities (controversial weapons, tobacco, thermal coal), ESG scores, and United National Global Compact (UNGC) scores. The remaining eligible companies are ordered by S&P DJI ESG Score within their GICS® industry groups, and constituents are selected targeting 75% of the market capitalization in each S&P Europe 350 industry group.

Please see the index methodology for a full breakdown of the index construction rules.

Why Choose the S&P Europe 350 ESG Index?

  • The S&P Europe 350 ESG Index utilizes both ESG screens and ESG scores. This is an established methodology that resonates with the European market—almost 70% of the more than USD 4 billion invested in the S&P 500® ESG Index, which uses the same methodology, is invested in products listed in Europe.
  • The index uses market-leading S&P Global ESG datasets that are built on a foundation of hundreds of ESG data points collected from public sources, as well as direct company dialogue. Companies are assessed against unique ESG surveys for 61 industries, based on salient ESG risks and opportunities.
  • S&P Global Media & Stakeholder Analysis (MSA)—an ongoing ESG controversy monitoring ensures any constituent that experiences a significant ESG incident between rebalances can quickly be removed from the S&P Europe 350 ESG Index.
  • The methodology incorporates E&S characteristics (via S&P DJI ESG Scores) and proxies for good governance (i.e., companies with low UNGC scores are excluded and controversies monitoring using the MSA) and therefore potentially aligns with Article 8 of the EU Sustainable Finance Disclosure Regulation.

Why Incorporate S&P DJI ESG Scores?

The results of the April 2021 index rebalance emphasize the importance of incorporating S&P DJI ESG Scores into the index methodology. Seven of the top 10 constituent exclusions were due to ESG scores (see Exhibit 1).

For instance, Novo Nordisk has had a deteriorating ESG score over the past few years, decreasing from 98 in 2018 down to a score of 69 in 2020. Notable areas of material weakness for the company are human capital development and innovation management.

The S&P Europe 350 ESG Index had 246 constituents as of April 2021, as companies with low-ESG scores or those companies conducting business activities which are not consistent with ESG norms from the underlying index were excluded. The index offers an improved S&P DJI ESG Score of 6.85%* over the benchmark, as well as a low tracking error of 1.04%. The result is a broad European index that incorporates robust ESG objectives for sustainably conscious investors.


* ESG Score Improvement is calculated as the difference between the index-level ESG score of the ESG index and the index-level ESG score of its underlying index.

The posts on this blog are opinions, not advice. Please read our Disclaimers.