There are several key differences between the S&P 500 and the Dow Jones Industrial Average (DJIA). To begin with, the S&P 500 is weighted by market cap whereas the DJIA is weighted by stock price. Because the S&P’s weighting is based on market capitalization institutional investors view it as a more reliable index for assessing market trends.
For example, if a large cap company issues a stock split, it would have a disproportionate effect on the Dow. By contrast, the S&P 500 looks only at the market capitalization and thus would be less affected.
Second, the S&P 500 is more diverse. It’s comprised of 500 stocks that represent a variety of sectors of the U.S. economy. The DJIA is composed of just 30 components (companies) making it much less diverse.
The third difference is in the way the components change. The components of the DJIA change from time to time. However, the changes are fairly rare and any changes tend to follow a formula.
As pointed out above, the S&P 500 index is actively managed. This allows the committee that decides on the components a great deal of flexibility regarding the S&P 500 guidelines. For example, when the insurance giant AIG was bailed out after the collapse of Lehman Brothers the S&P 500 committee kept the company in the index even though, according to its guidelines, a company must have a public float of over 50%.
A second example, on a smaller scale, took place when Google issued a stock split and issued non-voting stock, the committee recognized that some of the rules would have to be revised and then revised them again in response to major investors who expressed concerns based on the heavy volume of trading that would be required until the schedule was published.