Nvidia, one of the great stocks of our time, was just added to the Dow 30 Industrial Average. To be clear, this is a distinct honor, as the Dow Jones Industrial Average has been selecting 30 “Blue Chip” stocks since 1896. However, let’s face it, the Dow 30 has been woefully out of date for many decades now. It is a tired Index, that needs to be replaced. Today’s selection of Nvidia, after a 601,000% (6,000x) return since it’s 01/21/1999 inception, is a sign. A large bold, flashing neon sign that the Dow 30 is a useless index. The Dow Jones Industrial Average (Dow 30) needs to be replaced. Preferably something new that looks forward rather than back. Fortunately, such a thing exists and its been around since 6/30/2005. It’s called the Entrepreneur 30 Total Return Index (ER30TR), and it just might be the best Index for the past 20 years. The data below makes the case.
The long history of the venerable Dow Jones Industrial Average dates back approximately 130 years. In that time the Index has changed some of its components 58 times. While this has the appearance of stability, it also demonstrates glacial movement. A clear indicator of moving much too slowly. Take for instance the latest example with Nvidia. Finally, the Dow Jones on November 4, 2024 allowed Nvidia to enter its esteemed Index. By way of background, Nvidia is the largest, most celebrated company within the Magnificent Seven. It has a market capitalization that is just shy of $4 trillion. How much more appreciation does the Dow Committee expect this company can go? If this stock doubles a few more times it could theoretically reach the GDP of the entire US economy. And, sadly, this is not the first time that the Dow Jones Industrial Average has come late to the party. Amazon, itself a $2 Trillion company, was just added earlier this year. Apple was added almost 5 years after Founder/CEO, Steve Jobs, tragically died, and Salesforce entered the Dow well after its’ significant run up. In fact, the one key consistency of the Dow Jones Industrial Average, is its ability and willingness to add stocks toward the end of an extensive run up. Is this an Index that investors want to invest and monitor?
No. Fortunately, there is a forward looking Index. It is the Entrepreneur 30 Total Return Index (ER30TR) and it focuses on growth companies of the future. It bases its’ inclusion on a variety of factors that establish entrepreneurial culture. It is more than just a Founder/CEO Index, and demonstrates that Leadership Matters. This Index introduced Nvidia at its 6/30/2005 inception and added Apple and Amazon in the next quarter 9/30/2005. By contrast, the Dow 30 did not introduce, Apple until March 19, 2015, Salesforce in 2020, Amazon on February 26, 2024 and Nvidia on 11/4/2024. Moreover, of the 18 changes that the Dow 30 introduced over the past 20 years, only 1 change proved to be better than the ER30TR Index—a purchase of United Health in 2012.
The late additions for the Dow demonstrate an inability to capture market returns in a timely manner. And as most investors and wealth advisors know, generating early returns is key to the compounding effect of building wealth in a portfolio.
The exhibit below shows the entry points for the ER30TR Index acquiring Amazon (AMZN) and Salesforce (CRM) compared to the late timing of the Dow 30. Clearly, the Dow 30 came in many years later. Due to the early timing of the ER30TR inclusion, the total return, to date, for AMZN and CRM is appreciably higher in ER30TR compared with the Dow 30. As the example shows below, the ER30TR Index added AMZN into its constituents shortly after its 6/30/2005 inception. This return provided a compounded return of over 8,400%. By comparison, the Dow 30 just recently added AMZN in 2024, and has thus far, generated a return of only 13%. Similarly, the ER30TR added CRM in 2007 and netted a return of 1800%+ compared to the 9% generated by the Dow.
The graph below shows the timing of AAPL. While the ER30TR Index added AAPL in 2005, and later sold in 2011 (just after the death of founder Steve Jobs), the Dow did not add AAPL until 2015. The 611% return that the ER30TR generated during the 2005-2011 time period, almost equated the 681% that the Dow generated from 2015 to the present time. However, in order to equate the returns, and the early entry of the ER30TR in 2005, the distributions in 2011 from the AAPL sale, could be reasonably assumed to be reinvested at the ER30TR average rate. Consequently, the early entry of getting into AAPL in 2005, would equal not 611% (total return), but rather closer to 5000%+, given compounded reinvestment returns.
The final graph shows the most startling comparison. In the exhibit below (shown again), we see that the ER30TR Index inducted Nvidia at its 6/30/2005 inception. By comparison, the Dow 30 just added the stock on 11/4/2024. The almost 20 year gap is virtually impossible for any index to recoup. Whereas the ER30TR Index generated over 67,000%+ on its Nvidia investment, and needed to rebalance many, many times over the years, the Dow 30 has yet to earn a dime. For an index, or any portfolio, this is a fatal flaw. Early returns are necessary to maximize wealth creation. Moreover, it is not clear why the Committee would have excluded Nvidia for the first 25 years of its existence, yet decide in late 2024, that Nvidia is an appropriate fit. If the Dow Committee were to argue that the technical nature of the company was inappropriate for its index earlier in its life, then it should still be excluded, logically, forever. It should not become magically appropriate after 25 years and nearly $4 trillion in market cap. The same argument holds for Apple, Salesforce and Amazon.
The table below provides a summary of the impact on timing and the potential cost for delayed entry into an index (or portfolio). The results, when compounded over many years, can providing a staggering differential in overall results (as illustrated on the bottom chart).
The Exhibit below shows how the Entrepreneur 30 Total Return Index (ER30TR) has significantly out performed the Dow 30 for approximately 20 years (6/30/2005 inception through 11/4/2024).
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The differential in performance is staggering. Whereas the Dow 30 Industrial Average generated close to 550% in the past 19+ years, the ER30TR Index has generated close to 1783%. This is more than 3x the Dow. Much, but not all, of the extra performance can be attributed to early timing of future Magnificent 7 stocks (Nvidia, Apple and Amazon) but note that other strong growth companies contributed as well.
To be fair, the ER30TR Index is not perfect, and the Dow 30 clearly has lower volatility, and less extreme dips. However, as an active Index, the ER30TR has the benefit of readjusting to prior issues, rebalancing and reconstituting quarterly, and providing overlays to mitigate future issues. Presumably, it has attempted to correct prior errors so that they are minimized in the future.
Moreover, it is important to note that unlike the QQQ and Russell 1000 Growth indices, the ER30TR is not heavily weighted in the Magnificent Seven. YTD (11/4/2024) the ER30TR Index is +37.1% and the Dow 30 is +12.6%. Moreover, the ER30TR does not own four of the Magnificent Seven stocks and is underweight comparable growth indices in two of the remaining Mag Seven stocks. Most of the performance originates from stocks besides the Mag Seven, though the presumption is that if such a thing as a future Mag Seven stock exists in the marketplace today, there is a good chance that it will find an early home in the ER30TR Index.
Finally, this treatise provides a spotlight on the importance of early detection and portfolio inclusion. The Entrepreneur 30 TR is a proprietary, academic model that evolved out of the investment criteria applied in the Venture Capital and Private Equity Industry. In 2005, when the Index originated, it was possible to identify and buy a public stock like Nvidia, with early detection models. No more. In the past few years, private companies have delayed their public filings and stocks like Nvidia are not available to the public until they are much more mature. More than 110 private companies now hold an implied market capitalization of more than $10 Billion, or above the large cap mandate for public funds. Moreover, some high profile private companies, such as SpaceX, now have an implied market cap exceeding $200 Billion. Such appreciation, prior to the public market offering, suggests that the best returns are being offered to institutional and high net worth investors long before retail investors have a chance to participate.
Retail investors, who need to wait for a future private company to IPO, can simply observe the late timing of a Dow inclusion, and lost appreciation, to gain awareness of needless delay. In both cases, most of the return will have already been exhausted by the time they get in.
Fortunately, new products are now entering the arena to allow retail investors to get in early on private deals. XOVR is the first to allow such an opportunity, but others may soon be on their way. Irrespective of the type of fund wrapper, it will be important to find a group that has a track record of early detection. This will always be the key differentiator to reaping top rewards.
Past performance is no guarantee of future results. Please refer to the below disclosures: https://lnkd.in/e29X6rN
Eva Ados discusses a new crossover fund (Nasdaq Ticker: XOVR) that includes the ER30TR Index and private equities.
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