DEFINITION of Blue Chip Indicator

Blue chip indicators are a formal gauge of the most widely owned stocks in the investment universe. They often exhibit similar qualities to other indexes, in that they track the performance of a group of assets – in this case, blue-chip stocks – over a given period of time. Investors use blue chip indicators as a benchmark for the economy and the stock market. Many blue-chip companies offer stable and consistent returns, making them ideal bellwethers of an industry's or region's economic strength.

BREAKING DOWN Blue Chip Indicator

Blue chip indicators are the foundation of many investment portfolios. The Dow Jones Industrial Average is arguably the most popular blue chip indicator. It seeks to track the performance of the 30 most widely owned and largest public companies. The index is calculated by a price weighted method and adjusted to account for corporate events, such as splits and buybacks. Besides the Dow, other examples of blue chip indicators include the New Europe Blue Chip Index, which tracks 30 of the most traded stocks in central, eastern, and southeastern Europe, and the DAX, which follows the top 30 companies on the Frankfurt Stock Exchange. 

The term blue chip originates from poker, where the highest-denominated chip is colored blue. And while there is no agreed upon definition of what constitutes a blue chip company, they all share similar qualities. For one thing, blue-chip stocks have a track record of stable earnings growth and often reward shareholders with buybacks and dividend payments. In addition, the companies often command a substantial competitive advantage that enables them to maintain a dominant position in a specific sector. Many investors approaching retirement leverage blue-chip stocks to construct a low risk, income generating portfolio.

Drawbacks of Blue Chip Indictors

The features of blue chip stocks are ideal for wealthy and older investors looking to preserve wealth. Buying shares of a stable company and reinvesting dividend payments along the way is not a bad investment by any means. However, young investors with long investment horizons are often perturbed by the limited growth potential and instead flock to high-growth names like Amazon (AMZN​) and Facebook (FB).

It is also difficult for a blue chip indicator, like the Dow 30, to gauge the health of the stock market when the entire investment universe consists of thousands of assets. More investors are now watching the S&P 500, as it covers a broader array of industries and sectors often missing from traditional blue chip indicators.