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If you follow financial news, then you must have surely heard about the Dow Jones Industrial Average (DJIA, or Dow), the S&P 500, or the Nasdaq Composite Index. All three indexes are considered measures of market performance on any given day. They are also the basis for many investment products that are modeled on their daily price movements.
The financial jargon notwithstanding, it can be difficult, even confusing, to distinguish among the indexes and products based on their performance. Read on to find out more about the differences among the three indexes and how you can base your investment decisions based on their performance and market conditions. 
There are three main points of difference among the Nasdaq Composite, the S&P 500, and the Dow. The first one relates to their coverage universe and the sectors that are part of the index. The Nasdaq Composite and the S&P 500 cover more companies in different sectors than the Dow does.

The second difference is their method of assigning weights to individual companies in their index. The Nasdaq Composite and the S&P 500 weigh their constituents based on market capitalizations (market caps), while the DJIA uses each constituent stock’s price to determine its weight in the index.

The final difference is the criteria used to select constituents of the respective indexes. The Dow is more value-oriented and uses a mix of quantitative and qualitative factors to determine whether a given stock should be included in its index compared to the other two.

Launched in 1971, the Nasdaq Composite Index had an initial value of 100 and includes almost all companies listed on the Nasdaq stock exchange. In fact, one of the criteria for inclusion into the index is a listing on the exchange.

The Nasdaq Composite has more than 3,000 stocks as constituents and is a capitalization-weighted index, meaning that it assigns weightings based on market caps of the respective companies. The composite’s performance reflects that of the exchange, which in turn is indicative of the performance of the technology sector. This is because the sector makes up roughly 50% of the overall composition of the index. The top 10 companies tracked by the index were technology giants and accounted for 46% of the overall weight of the index, according to September 2021 research.

As the tech industry’s stature has grown, the Nasdaq Composite’s value has surged. For example, during the dotcom bubble that engulfed tech stocks at the turn of the century, the Nasdaq Composite skyrocketed to 5,046.86 on March 9, 2000. It crashed by more than 4,000 points shortly thereafter and took 15 years to reach 5,000 again. The pandemic-induced boom in stocks once again boosted tech valuations in 2021, and the index’s value shot up, reaching an all-time high of 16,057.44 on Nov. 19, 2021.

The Dow Jones Industrial Average (DJIA) was established in 1896 with 12 members and is the oldest of the three indexes. With only 30 constituents, the Dow—as it is popularly called—also has the fewest members. The Dow is a price-weighted, large-cap index, meaning that its overall value is determined by the daily stock price of its constituents.
Thus, a stock with a high price will have a disproportionately big impact on the Dow’s value. The Dow is considered a blue-chip index because it tracks the performance of key companies that are household names and are supposed to comprise a subset of the American economy.

But it is not comprehensive. For example, there are no utilities or transportation companies in the Dow. (They are tracked by the Dow Jones Utility Average and the Dow Jones Transportation Average.) As of April 2022, the Dow covered equities in nine sectors ranging from information technology (IT) to energy and financials. 

The selection criteria for the Dow are a mix of quantitative and qualitative factors. Thus, it includes companies that have a sterling reputation in their respective industries and have a history of generating profits over the long term. The emphasis on qualitative factors restricts the number of companies that can become members of the index. In contrast, the Nasdaq Composite and the S&P 500 have a bigger coverage universe that attempts to cover many companies in different sectors. 

The Dow’s selective makeup means that it is not always an accurate gauge of the stock market’s performance or of the U.S. economy. For example, in a rising market, there might be instances when investors rotate out of established names into growth stocks that may not be represented in the index. During such periods, the S&P 500, which includes more companies, will have higher gains than the DJIA will. The Dow closed at an all-time high of 36,799.65 points on Jan. 4, 2022.

Like the Nasdaq Composite, the S&P 500 is a market cap-weighted index of large-cap stocks. It has 500 constituents that represent a diverse set of companies from multiple industries. In 1999, the S&P and MSCI developed the Global Industry Classification Standard (GICS), a global classification system of companies, and created 11 sectors and 69 industries that are represented in the index.
The S&P 500 is considered a better reflection of the market’s performance across all sectors compared to the Nasdaq Composite and the Dow. The downside to having more sectors included in the index is that the S&P 500 tends to be more volatile than the Dow. Thus, its gains may be higher on days when the market does well and losses steeper when the market falls.

To be included in the S&P 500, a company must fulfill certain quantitative criteria. These include having a market capitalization of at least $14.6 billion, be highly liquid, and have a public float of at least 10% of its shares outstanding. The S&P 500 reached an all-time high of 4,796.56 as of Jan. 3, 2022. 

Valuations of the indexes across all three sectors are highly correlated. Thus, all three generally rise or fall together. But the extent of gains or losses differs for each index. The decision to invest in a particular index depends on your strategy and goals:
The choice of a particular index is not a zero-sum game, however. Several stocks are included in all three listings. This is especially true of stocks from sectors that are ascendant in the economy.

Depending on the economy and the state of the markets, the indexes produce different individual returns even as they mirror each other’s price movements. Here’s an example: In the 2010 bull market, the DJIA rose 11% vs. the 12.8% jump for the S&P 500. Meanwhile, the Nasdaq Composite racked up 17% gains on the back of an excellent performance of the tech sector, which dominated stock market performance that year.

The higher figure for the S&P 500 in 2010 was primarily a function of a greater number of small stocks, which attract investor flows of cash during stock market booms, in the index. But the preponderance of small stocks means that the S&P 500 loses value during downturns, when investors flee to the relative safety and dividends of blue-chip names in the Dow.

There are three main points of difference among the S&P 500, the Nasdaq Composite, and the Dow Jones Industrial Average (DJIA, or Dow): the criteria that they use to include stocks, their method of assigning weightings to constituents, and their coverage universe. While the Nasdaq Composite and the S&P 500 are market capitalization (market cap)-weighted, the Dow assigns weights based on the price of a stock. The Nasdaq Composite and the S&P 500 also have broader and bigger coverage universes compared to the Dow.
Depending on the economy, and the state of the markets, one index may produce higher returns than the others do. For example, in rising markets, the S&P 500 can produce higher gains compared to the Dow due to the presence of more sectors and small-cap stocks in its portfolio. The opposite happens during downturns, when investors move into the safe harbor provided by the stocks of well-established companies with proven business models and dividends.
In a price-weighted index, the stock price is used to assign weightings. Thus, a stock with a high trading price will be assigned a bigger weight compared to one with a lower price. In a market cap-weighted index, a stock with a higher market cap is assigned a higher weight compared to one with a lower market cap.
The S&P 500, the Dow, and the Nasdaq Composite are different indexes used to track market performance. Even though they have different pedigrees, inclusion criteria, and sectoral composition, the indexes generally move in the same direction.
Depending on the economy and the state of the markets, one index may produce higher returns than the others. For example, in rising markets, the S&P 500 can produce higher gains compared to the Dow due to the presence of more sectors and small-cap stocks in its portfolio. The opposite happens during downturns, when investors move into the safe harbor provided by the stocks of well-established companies with proven business models and dividends.

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