Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Dow Jones Transportation Average (DJTA)

What it is:

The Dow Jones Transportation Average (DJTA) is the most widely recognized gauge of the transportation sector. It is also the oldest index used today, even older than its more famous brother, the Dow Jones Industrial Average (DJIA). The Transportation Average was the first stock index developed by Charles Dow in 1884.

How it works (Example):

At inception, the Dow Jones Transportation Average held only nine stocks (all railroads). In 1896 it was modified to include 20 actively traded stocks, including 18 railroads. (As you can probably guess, automotive and airline stocks were not added to the index until much later.) The index is often referred to simply as the Dow Jones Transports.

Today, the DJTA is composed of 20 stocks that are chosen to represent the transportation industry. Like other Dow Jones Averages, it is a price-weighted index, meaninga firm's relative weight in the index is determined by its share price, not by its market capitalization. As of 2010, some well-known companies tracked by this index include Southwest Airlines Co., Union Pacific Corporation and Continental Airlines, Inc.

Why it Matters:

One positive aspect of the index is that it has the longest track record of any index tracking U.S. stocks. Though it is the oldest index used today, few non-professional investors actually track the performance of the Dow Jones Transports. As the economy has become more technology and service based, this index has lost some of its prominence in financial discussion. As noted earlier, it is also a price-weighted index, and many investors question the interpretation of indices weighted in this fashion.

Investors interested in trading the transports should consider the iShares Dow Jones Transportation Fund (IYT) -- an exchange-traded fund (ETF) that tracks the performance of this index. IYT almost perfectly tracks the Dow Jones Transports and can be easily traded throughout the day just like a common stock.