Mark Hulbert at Marketwatch touches on the same issue: What happens to Stocks added and deleted form the Dow?
According to Norman Fosback, editor of Fosback's Fund Forecaster, the Dow would today be more than twice its quoted level had IBM not been removed in 1939.
Are these examples typical of all changes made over the past 110 years? I don't know, since I have not gone back and calculated the returns of all stocks that were added or deleted to the Dow subsequent to its creation in 1896. But I wouldn't be surprised if the average deleted stock has outperformed the average addition.
That's because companies that are added often are coming off a period of dynamic growth. A company that is substantially out of favor typically does not get added. This skews the Dow towards the large-cap growth sector of the market, which historically has underperformed smaller stocks and issues that are closer to the value end of the value-growth spectrum.
Therefore, to follow the Dow's moves is not a very good way to track the performance of the US stock market.
I suggest you rather monitor the Willshire 5000 index, which represents the broadest index for the U.S. equity market. This should give you a better indication of where the market is heading.
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