What Is a Blue-Chip Index?
A blue-chip index is an index that tracks shares of the well-known and financially stable publicly traded companies—known as blue chips. Blue-chip stocks represent companies that provide investors with consistent returns, making them desirable investments. Blue-chip companies are considered a gauge of the relative strength of an industry or economy.
A blue-chip index is a bellwether, meaning news reports and analysts tend to emphasize the performance of major blue-chip stock indexes, such as the S&P 500 and Dow Jones Industrial Average (DIJA), each day.
- Blue-chip stocks, which make up a blue-chip index, are desirable investments that provide investors with consistent returns.
- Blue chips have a track record of stable earnings growth and tend to pay steady dividends.
- The most notable blue-chip indices include the S&P 500 and the Dow Jones Industrial Average.
- Blue-chip exchange-traded funds (ETFs) allow investors to purchase a variety of blue-chip stocks, as opposed to the higher risk involved by selecting individual stocks.
How a Blue-Chip Index Works
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 DIJA and S&P 500, 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, all blue chips 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.
There are many well known ETFs on the market, but only a handful of notable blue-chip ETFs following blue-chip indices, including the SPDR S&P 500 and iShares Core S&P 500 ETFs that follow the S&P 500.
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 U.S. stock market, including Amazon (AMZN), Alphabet (GOOGL), and Facebook (FB).
Example of a Blue-Chip Index
There are notable exchange-traded funds (ETF) that follow blue-chip indices. Following the S&P 500 index is the SPDR S&P 500 ETF (SPY) and iShares Core S&P 500 ETF (IVV) ETFs. One of the top ETFs following the DIJA is the SPDR Dow Jones Industrial Average ETF (DIA).
The SPY was one of the first ETFs, with an inception date that goes back to 1993, and has grown into one of the largest ETFs with $257 billion in assets under management (AUM). The IVV has $178 billion in AUM and an inception date in 2000. These two ETFs have traded in relative lockstep with the S&P 500, within 50 basis points of each other on a total return basis over the last five years. The DIA ETF, launched in 1998, has $20.7 bill in AUM.