Introduction

The four major U.S. stock market indices hold a pivotal position in the global stock market, profoundly influencing the international economic landscape. These indices are not only barometers of the health of the U.S. economy but also essential tools for investors to understand the development trends across various industries in the U.S. They showcase unique characteristics and advantages by covering different industries, market sizes, and investor preferences.

This article will provide a comparative analysis of the four major U.S. stock market indices: the Dow Jones Industrial Average (DJIA), the Standard & Poor’s 500 Index (S&P 500), the Nasdaq Composite Index (NASDAQ Composite), and the Philadelphia Semiconductor Index (SOX). The discussion will include their composition, calculation methods, volatility characteristics, and historical annualized performance. The goal is to offer investors a basic understanding of the U.S. stock market and provide investment references based on each index’s distinct features, enabling smarter portfolio decisions in a complex market environment.

The Four Major U.S. Stock Market Indices

1. Dow Jones Industrial Average (DJIA)

Constituent Composition

The Dow Jones Industrial Average (DJIA) is the second oldest index in the U.S. market, following the Dow Jones Transportation Average. It encompasses most economic sectors except for transportation and utilities, covering key industries such as aviation, finance, and manufacturing. With its long history and significant market representation, the DJIA is widely regarded as a barometer of the U.S. economy.

The index comprises 30 large traditional blue-chip companies listed on U.S. stock exchanges. Its components are relatively stable, having undergone only 59 changes since its inception in 1896, averaging one change every two years. The selection criteria are based on consistent corporate performance, requiring companies to have significant scale, excellent reputation, and industry representation to maintain their leadership within sectors.

Historical changes in Dow Jones Industrial Average components (Source: spglobal)

Index Calculation Method

The DJIA is a price-weighted index, meaning its weighting skews toward higher-priced stocks. The index is calculated by summing the prices of its 30 constituent stocks and dividing the total by a specific divisor (adjustment factor). This approach gives companies with higher stock prices greater influence on the index, regardless of their market capitalization. The divisor is adjusted for events such as stock splits, spin-offs, or dividends to ensure the continuity of the index.

The formula is as follows:

（Where p is the price of the constituent stocks, and d is the Dow divisor.)

Volatility Analysis
As a representative of blue-chip stocks, the DJIA’s constituents are typically industry leaders with stable operations, leading to relatively low price volatility. However, due to its concentrated composition, fluctuations in individual stock performance can significantly impact the index, creating a notable beta effect.

In summary, the DJIA includes traditional corporate giants, exhibits low overall volatility, and possesses strong resilience to risk.

Annualized Returns
While the DJIA does not represent all U.S. companies, it tracks a broad market average and sets the tone for global stock markets. According to official data, the DJIA’s base value on May 26, 1896, was 40.94. By May 25, 2018, the closing value had risen to 25,516.8, reflecting a compound annual growth rate (CAGR) of 5.42% over 122 years.

Between 1980 and 2023, the DJIA achieved an annualized return of 8.90%, highlighting the steady development of the U.S. economy and the recovery of financial markets, showcasing the potential of long-term investment in the U.S. stock market.

The Dow Jones Industrial Average has shown a steady upward trend over many years (Source: commons.wikimedia.org)

Comprehensive Evaluation

The DJIA’s limited inclusion of only 30 stocks results in restricted sector coverage. In recent years, as technology stocks have dominated the market, the DJIA has shown reduced representation of emerging industries and is less effective at reflecting overall market performance. Additionally, its price-weighted methodology gives higher-priced stocks more influence, potentially undervaluing the performance of growth-oriented companies.

However, data shows that the Dow Jones Index’s long-term returns remain highly correlated with other stock indices. For example, from 1980 to 2023, the Dow Jones Index’s annualized return was 8.90%, almost identical to the S&P 500’s 8.91%, indicating that while the Dow Jones Index has structural limitations in gauging short-term fluctuations, in the long term, as a tool for understanding traditional industries and blue-chip stock performance, it remains one of the reliable indicators of the U.S. economic conditions, and is more suitable for analyzing historical growth trends in the U.S. stock market.

2. S&P 500 Index

Constituent Composition

The S&P 500 Index, launched in 1957, is designed to track the performance of the largest 500 publicly traded companies in the U.S. stock market. The index covers a diverse range of sectors and industries, including technology, healthcare, and consumer goods, accounting for approximately 80% of the total market capitalization of U.S.-listed companies. It is reviewed and updated quarterly and serves as a benchmark indicator of the overall health of the U.S. economy.

Maintained by S&P Dow Jones Indices, the selection of constituents is made by a committee based on the following criteria:

● Market Cap: Minimum market capitalization of $18 billion (effective April 2024).
● Liquidity: A ratio of annual dollar trading value to float-adjusted market capitalization of at least 0.75.
● Trading Volume: A minimum monthly trading volume of 250,000 shares over the six months before the evaluation date.
● Stock Exchange: Companies must be publicly listed on the NYSE or Nasdaq.
● Domicile: Companies must be subject to U.S. securities laws and derive at least 50% of their revenue from the U.S.

Additional discretionary factors may also influence inclusion. For example, Tesla was initially excluded from consideration due to concerns about its stock’s extreme volatility and its potential impact on the index’s reputation.

Latest S&P 500 Index inclusion criteria (Source: spglobal)

As of September 30, 2024, the top nine companies in the S&P 500 accounted for 34.6% of the total market capitalization. In order of weight, the largest constituents are Apple, Microsoft, NVIDIA, Amazon.com, Meta, Alphabet, Berkshire Hathaway, Broadcom, and Tesla. Companies that consecutively increased dividends for 25 years are designated as S&P 500 Dividend Aristocrats.

S&P 500 Index Sector Distribution (Source: cityindex)

Index Calculation Method

The S&P 500 Index uses a free-float methodology, emphasizing market capitalization as the core measure of a company’s value. The index value is calculated by summing the float-adjusted market capitalizations of all 500 constituent companies and dividing by a specific divisor. For instance, if the total market capitalization is $13 trillion and the divisor is 8.9 billion, the S&P 500 index value would be 1,460.67.

Unlike the price-weighted DJIA, the S&P 500 does not adjust its divisor for stock splits, as such events do not affect a company’s market capitalization, thereby maintaining index stability. However, the divisor may be adjusted for events like stock issuances or mergers.

The index allocates weights to constituents based on their market capitalization as a proportion of the total market capitalization. For example, if Apple’s market cap is $2 trillion and the index’s total market cap is $30 trillion, Apple’s weight would be approximately 6.6%. This methodology reflects the relative impact of each constituent on the index’s overall performance.

Volatility Analysis

Thanks to its diversified constituents, the S&P 500 Index exhibits lower volatility compared to indices with a high concentration in specific industries. Even during economic downturns, such as the pandemic, defensive sectors like healthcare and consumer staples help stabilize overall volatility. Additionally, its long-term returns outperform traditional stable indices like the Dow Jones Industrial Average, enabling the S&P 500 to strike a good balance between volatility and returns.

The main risk lies in its uneven weight distribution, with the top 10 constituents (e.g., Apple, Microsoft, Amazon) accounting for over 30% of the total weight. As a result, the S&P 500 is significantly influenced by macroeconomic conditions and trends in the technology sector. Overall, the index demonstrates moderate volatility, with relatively manageable risks.

Annualized Returns

Since its inception in 1926, the S&P 500 Index has achieved annual growth in 70% of the years, with a compound annual growth rate (CAGR) of approximately 9.8%. Notably, funds tracking the S&P 500 have delivered impressive performance, such as the Vanguard S&P 500 ETF, which has achieved an average annual return of 14.61% since 2010, underscoring the index’s value for long-term investment.

S&P 500 Index Annual Closing Returns (Source: cap rates)

Comprehensive Evaluation

The S&P 500 Index, as a benchmark of the U.S. stock market, offers extensive market coverage and diverse industry representation. Since its launch in 1957, it has weathered numerous market cycles, demonstrating robust long-term growth and earning its status as a global standard for measuring U.S. stock market performance. It is widely regarded as a reliable representative of the U.S. large-cap market.

However, the index’s reliance on macroeconomic conditions can be a drawback. Financial crises, for instance, impact financial stocks like banks, increase borrowing costs, and reduce market liquidity. Additionally, Federal Reserve interest rate hikes may pressure real estate and financial stocks, while even cash-rich technology companies may face limited benefits in high-rate environments.

With the growing dominance of technology in the S&P 500, giants such as Microsoft, Amazon, and Tesla collectively account for over 25% of the index’s weight. This trend highlights the increasing reliance of the index on the health of the technology sector. Investors are advised to diversify their portfolios and closely monitor macroeconomic indicators like inflation and Federal Reserve policies to assess potential risks.

3. Nasdaq Composite Index

Constituent Composition

The Nasdaq Composite Index, initially designed as a “price system,” has grown to become one of the three most-watched stock market indices in the U.S., alongside the Dow Jones Industrial Average and the S&P 500 Index. While its components are predominantly technology stocks, the index is highly diversified. Unlike other indices, the Nasdaq Composite imposes no minimum requirements on market capitalization, liquidity, geography, or industry. It includes over 3,000 companies from various sectors, such as consumer goods, healthcare, and finance, provided they are listed on the Nasdaq exchange.

The index also features sub-indices, such as the Nasdaq Financial 100 Index, comprising banks, insurance companies, and mortgage lenders, and the Nasdaq-100 Index, which represents 100 non-financial companies from the Nasdaq Composite and accounts for approximately 80% of its total weight.

For a list of the top 20 constituents by weight (Source: nasdaq)

To be eligible for inclusion in the Nasdaq Composite, securities must be listed exclusively on the Nasdaq Stock Market, unless dual-listed on another U.S. exchange before 2004 and maintaining that listing. Eligible security types include:

● American Depository Receipts (ADR)
● Common Stock
● Limited Partnership Interests
● Real Estate Investment Trusts (REITs)
● Beneficial Interest Shares (SBI)
● Tracking Stocks

Index Calculation Method

NASDAQ Composite Index = (Total market value of all component stocks) / (Index divisor)

The NASDAQ Composite Index uses market value weighting. The calculation method takes the sum of all securities’ closing prices multiplied by their index shares daily, then divides the total by a divisor, which is used to smooth out changes in total market value caused by new stock issuances, stock splits, and other such activities.

Additionally, the NASDAQ Composite Index is calculated based on prices viewed every minute. When the trading day ends, the final NASDAQ Composite Index is determined and reported at 4:16 PM Eastern Time (market closes at 4:00 PM Eastern Time).

NASDAQ Composite Index components are reconfirmed daily (Source: indexes.nasdaqomx.com)

Volatility Analysis

The Nasdaq Composite is heavily weighted toward technology stocks, making it particularly sensitive to market sentiment, interest rate fluctuations, and regulatory developments. While the tech sector’s high growth potential has driven strong performance, it also introduces higher risk than other major indices.

In 2024, rapid advancements in artificial intelligence (AI) fueled enthusiasm for tech stocks, contributing to the Nasdaq Composite’s robust growth. However, this rapid rise carries the risk of price bubbles, increasing the index’s vulnerability. The index may experience significant volatility if AI development falls short of expectations. Investors should closely monitor the long-term trajectory of technological advancements.

The Nasdaq-100 Index, a subset of the Nasdaq Composite, consistently exhibits higher volatility than the S&P 500. (Source: cmegroup.com)

Annualized Returns

Since its inception in 1985, the Nasdaq Composite has achieved a cumulative increase of approximately 22,900% (including dividend reinvestment), with a compound annual growth rate (CAGR) of 14.8%. The S&P 500 Index’s cumulative return over the same period was 7,200%, with a CAGR of 11.5%.

However, high returns come with high risks. The Nasdaq-related indices have experienced significant drawdowns. For example, during the dot-com bubble from March 2000 to August 2002, the Nasdaq-100 Index declined by approximately 81.76%, taking until February 12, 2015, to recover its previous peak. Similarly, in 2022, concerns about Federal Reserve tightening and persistent inflation led to a sharp decline in the Nasdaq Composite.

While the index offers substantial long-term returns, investors must consider its higher volatility and potential downside risks when making investment decisions, taking into account their risk tolerance and investment horizon.

NASDAQ Composite Index Historical Trend 1971-2021 (Source: inefan.gr)

Comprehensive Evaluation

As the world’s first electronic stock exchange, Nasdaq has become a major platform for technology stocks, thanks to its flexible listing criteria. It plays a significant role in industries related to the internet and its downstream sectors. The Nasdaq Composite is widely regarded as a barometer of the global technology sector’s health and a key reference for assessing overall trends in the tech industry.

However, many constituents are startups, which, while offering high growth potential, also exhibit significant instability. This makes the Nasdaq Composite highly sensitive to market conditions. For instance, during the dot-com bubble burst in 2000, the index experienced severe declines as many internet companies saw their valuations plummet. Conversely, the rapid rise of cloud computing, artificial intelligence, and electric vehicles in recent years has driven strong recoveries in the Nasdaq Composite.

In the context of economic downturns and ongoing monetary tightening, the Nasdaq Composite has shown bullish characteristics in recent years, reflecting optimism about the future of U.S. tech stocks. However, for this upward trend to continue, breakthroughs in AI technologies and their applications are essential. Simultaneously, a shift by the Federal Reserve toward monetary easing in a low-inflation environment would be needed to stimulate consumer spending.

4. Philadelphia Semiconductor Index (SOX)

Constituent Composition

The Philadelphia Semiconductor Index (SOX), established by the Philadelphia Stock Exchange in 1993 and now managed by Nasdaq, consists of 30 leading semiconductor companies listed on U.S. exchanges. These companies operate in sectors such as electronics, communications, and artificial intelligence. The index reflects the overall performance of the semiconductor industry, with its constituent companies spanning key markets in the U.S., Europe, and Asia, making it closely tied to Taiwan’s economic landscape.

Example SOX Companies (Source: hao.cnyes.com)

The selection criteria for SOX constituents are strict, focusing on companies whose core businesses involve semiconductor design, manufacturing, or distribution. Key criteria include:

● Market Cap: Minimum of $100 million, with no active bankruptcy proceedings.
● Listing Exchange: Companies must be listed on Nasdaq, NYSE, NYSE American, or CBOE (non-U.S. companies can join via ADRs, with market cap calculated using depository shares).
● Liquidity: At least 1.5 million shares traded monthly for six consecutive months, with trading occurring for at least three months.

Index Methodology Updates as of April 2024 (Source: nasdaq)

According to the latest changes, aside from adjustments directly resulting from corporate actions, the index typically does not make share adjustments between scheduled rebalancing and reconstitution events. This modified adjustment mechanism indicates that the SOX index is beginning to place greater emphasis on stability and long-term value.

Index Calculation Method

SOX is a modified market-capitalization-weighted index that reflects the overall performance of the semiconductor industry.

Each constituent’s weight is calculated as its market cap divided by the total market cap of all constituents. To prevent any single company from exerting excessive influence, weights are adjusted in two steps:

Ⅰ: The top three companies are capped at weights of 12%, 10%, and 8%, respectively.

Ⅱ: Remaining constituents are capped at 4%.

If any company’s weight exceeds its limit, the excess is redistributed proportionally to lower-weighted constituents. This process continues iteratively until all weights comply with the limits.

Latest Changes to the Philadelphia Semiconductor Index (Source: nasdaq)

Please note that the index calculation methodology can change based on market conditions and the index provider’s strategies. For the most up-to-date calculation methodology of the Philadelphia Semiconductor Index, consult the index compilation plan on the Nasdaq official website.

Volatility Analysis

While the semiconductor industry offers considerable long-term returns, it is also a highly cyclical industry. The long cycle spans about 10 years, primarily driven by product technology iterations; the medium cycle is 3-4 years, related to capacity expansion driven by capital expenditure; and the short cycle lasts 3-6 quarters, typically determined by inventory fluctuations caused by supply-demand mismatches. The Philadelphia Semiconductor Index also reflects these cyclical characteristics.

Additionally, the SOX index only includes 30 constituent stocks, concentrated among a few large semiconductor companies such as NVIDIA and Intel. This high concentration makes the index particularly sensitive to individual company performance or market behavior, resulting in higher volatility compared to broad market indices like the S&P 500. Investors need to fully consider both the cyclical nature of the semiconductor industry and the index’s volatility risks.

Philadelphia Semiconductor Index vs. Semiconductor Sales YoY Growth Rate (Source: WSTS, CICC Research)

In the past two years, after reaching its peak, the SOX index showed a downward trend followed by a rapid rebound. The significant short-term fluctuations demonstrate the high volatility characteristics of the SOX index, which may form a “head and shoulders top” pattern, requiring constant vigilance against downside risks.

Annualized Returns

Between 2014 and 2024, the SOX index rose from 512 points to 5,122 points, achieving a cumulative return of 900.39% and an annualized return of approximately 25.90%, far exceeding the historical average returns of broader indices.

However, high returns often come with high risks. The Philadelphia Semiconductor Index’s volatility is far higher than that of broad market indices, primarily due to the cyclical nature of the semiconductor industry, including the combined effects of product iterations, capital expenditure, and inventory cycles. For example, after reaching a peak of 4,039 points at the end of 2021, the index plummeted to 2,162 points in October 2022, with a maximum decline of nearly 50%.

Investors must factor in potential losses from such extreme market volatility when assessing annualized risk.

Philadelphia Semiconductor Index Price Trend (Source: cn.investing.com)

Comprehensive Evaluation

Semiconductors have become essential to modern manufacturing, propelled by advances in artificial intelligence, digital transformation, and surging remote work needs. Major semiconductor companies are expanding their capacity and boosting R&D investments, while governments worldwide provide strong industry support. The U.S., for example, introduced the CHIPS Act with a $52 billion allocation to strengthen the semiconductor sector. Similarly, China created the National Integrated Circuit Industry Investment Fund, maintaining steady capital injections to build a competitive advantage.

Despite its immense growth potential, the semiconductor industry remains cyclical. In recent years, declining demand has become increasingly apparent, with falling PC and smartphone shipments reflecting weakened consumer demand. While long-term demand is expected to recover, the short-term outlook presents challenges, including compressed price-to-earnings ratios for semiconductor companies, which could weigh on stock prices.

US Proposes CHIPS Act for Semiconductor Research (Source: congress.gov)

Crypto Market vs. U.S. Stock Indices

In its early stages, Bitcoin went through a period of exploration. During this time, there was limited understanding of the nature of crypto assets, and mainstream investors and institutions maintained a cautious attitude toward them. This led to relatively independent price movements for crypto assets for some time. However, as Bitcoin gradually integrated into the global financial system, its decentralized nature and fixed supply cap attracted increasing attention. Over time, a bidirectional spillover effect began to emerge between crypto assets and traditional financial markets.

Performance Comparison of Cryptocurrencies and Stocks Over the Last Decade (source: Coinmetrics)

Marking Bitcoin’s price surpassing $1,000 in 2017 as a turning point, its trajectory began to show some synchronization with major U.S. stock indices. At the end of 2017, both Bitcoin and U.S. stock indices reached phase highs. Similarly, around the end of 2021, both markets nearly simultaneously peaked within the statistical period, followed by synchronized declines and rebounds. This indicates that macroeconomic factors such as global liquidity changes and monetary policy adjustments influence both traditional financial markets and the crypto market. Additionally, overlapping investor sentiment contributes to synchronized volatility during certain periods.

The chart below shows an analysis of Bitcoin’s daily volatility over the past five years. It reveals that Bitcoin’s overall correlation with the S&P 500 Index is relatively low, with its price movements primarily driven by intrinsic factors within the crypto market. Therefore, crypto assets can serve as an effective risk diversification tool in traditional investment portfolios. However, during periods of extreme market sentiment—such as when Bitcoin experiences sharp intraday increases (greater than +5%) or decreases (less than -5%)—its correlation with traditional markets, including the S&P 500, tends to increase.

Correlation statistics between Bitcoin and the S&P 500 index over the past five years (Source: tastylive.com)

Overall, market sentiment exhibits a resonance effect. During periods of abundant liquidity, Bitcoin may benefit from its high-risk, high-reward characteristics, moving in the same direction as the stock market. Conversely, under market pressure, Bitcoin, as a risk asset, may experience synchronized declines with the stock market. While this linkage cannot serve as the sole basis for investment decisions, it provides a valuable reference for analyzing market dynamics. In the future, as the institutionalization of the crypto market progresses, this dynamic correlation may reveal new patterns of value behavior.

Conclusion

An in-depth analysis of the four major U.S. stock indices reveals distinct differences in their constituent compositions and calculation methodologies, each with its own focus and emphasis. To help investors better understand these differences, we have summarized the key characteristics, suggested investment types, and risk profiles of these indices in a table. The goal is to provide investors with a practical reference framework for informed decision-making.