Dow Transports – A Price Weighted Index

IYT (iShares Dow Jones Transportation Average ETF) has been on a tear lately and we’ve been closely monitoring it. However, what we don’t like about this average is its price weighting methodology. Price weighting does not give an accurate representation of how the underlying securities are performing.Most indices are calculated based on a market cap ranking system, as evidenced by the next most recognizable index, the S&P 500, is based upon. Unfortunately, the venerable Dow Jones Industrial Average — probably the most heavily marketed index worldwide, is based on price. I know of many professional investors who refuse to even say those words, as they have no interest following something weighted by price.

CNBC has an example of DJ Transportation Average and how 11 of the 20 components are down in price since the last time it hit a high, but how the nature of the prices of each component has driven it to the point of re-capturing and trading at all time highs. Click here for the article and that concludes today’s educational posting. Have a pleasant week.

The graph is here:

                Today’s Price    Since Index’s Previous
                (as of 1:40pm)     High on 7/19/07
R                   $76.53             +39.81%
CSX               $68.38             +33.40%
UNP              $158.24             +25.85%
CHRW             $66.93             +22.74%
BNI               $111.49             +21.17%
JBHT              $35.98             +20.50%
NSC               $66.40             +14.82%
LSTR              $55.39             +10.85%
EXPD              $48.09              +2.54%
GMT               $49.00              -2.70%
OSG               $84.73              -5.34%
UPS               $71.47              -5.76%
CNW              $50.72             -10.12%
ALEX              $51.19             -12.03%
LUV               $13.42             -18.17%
FDX               $92.19             -21.34%
YRCW            $19.66             -45.75%
CAL               $17.59             -50.87%
JBLU                $5.07             -56.33%
AMR                $9.09             -66.27%