What is the Blue-Chip Index
The blue-chip index is a stock index that tracks shares of the top-performing publicly traded companies. Blue-chip stocks represent financially stable, well-established companies that provide investors with consistent returns, making them desirable investments. Since blue-chip companies tend to perform in line with the economy as a whole, the performance of a blue-chip index could be considered a gauge of an industry's or region's economic strength. For this reason, news reports tend to emphasize the performance of major blue-chip stock indexes, such as the Dow Jones Industrial Average (DIJA), each day.
BREAKING DOWN Blue-Chip Index
The blue-chip index seeks to gain exposure to a variety of stable stocks by purchasing shares of an exchange-traded fund or index fund, rather than selecting individual stocks. Besides the Dow Jones Industrial Average, other examples of blue-chip indexes include the New Europe Blue Chip Index (NTX), which tracks 30 of the top stocks traded in central, eastern and southeastern Europe, and the DAX Index, which tracks the top 30 companies on the Frankfurt Stock Exchange.
The term blue chip originates from the game of poker, where the highest denominated chip is colored blue. While there is no universal definition of what makes up a blue chip company, there are several qualities each company shares. For one thing, they all have a track record of stable earnings growth and reward shareholders by issuing dividend payments with excess profits. In addition, many of the companies possess a significant competitive advantage that allows them to maintain a leadership position in a specific industry. Many older investors find blue-chip indexes to strike an optimal balance between risk and reward that fits an ideal retirement portfolio.
Limitations of a Blue-Chip Index
The truth is a blue-chip index like the Dow 30 tracks the performance of merely 30 stocks when the total investment universe consists of thousands of assets. Instead, investors have started to use the S&P 500 – a market-capitalization-weighted index of the top 500 companies – as a benchmark for the stock market. It offers exposure to a broader array of industries and sectors that are often missing from a traditional blue-chip index.
Meanwhile, the Dow 30 puts a greater emphasis on price rather than standard market factors such as momentum, size, value, and market capitalization. In doing so, the Dow 30 excludes some of the best-performing and most dynamic companies in the US stock market, including Amazon (AMZN), Alphabet (GOOGL) and Facebook (FB).