Blue chip index: It monitors the stocks of reputable, financially sound publicly listed companies—also referred to as “blue chips”—is called a blue-chip index. Blue-chip companies are regarded as a barometer of the relative strength of a sector or economy since they consistently yield returns for investors, making them appealing investments.
A bellwether is a blue-chip index, which is one that news media and analysts typically highlight based on daily performance of the larger ones, including the Dow Jones Industrial Average (DJIA) and S&P 500.
How to Interpret a Blue Chip Index?
By acquiring shares of an exchange-traded fund (ETF) or index fund with a Blue chip index concentration, investors may participate in a blue-chip index and have exposure to a range of stable stocks. These passive vehicles allow you to own stakes at far lower costs than if you were to purchase all of the individual stocks that make up a blue-chip index.
In addition to the DJIA and S&P 500, additional blue-chip indexes that are commonly used are the DAX Index, which measures the top 30 businesses on the Frankfurt Stock Exchange, and the New Europe Blue Chip Index (NTX), which follows 30 of the top equities listed in central, eastern, and southeast Europe.
The phrase “blue chip” first appeared in the poker game, where the bluest chip represents the highest denomination. Although the characteristics of a blue-chip corporation are not universally understood, there are a number of characteristics that all of them have in common.
To start with, all blue chips have a history of consistent earnings growth and distribute surplus profits to shareholders as dividends. Furthermore, a lot of the businesses have a considerable competitive edge that helps them hold the top spot in a certain market.
Particular Points to Remember
When thousands of assets make up the whole financial universe, a blue-chip index like the DJIA analyzes the performance of just thirty stocks. Rather, as a benchmark for the stock market, investors are now using the S&P 500, which is a market-capitalization-weighted index of the top 500 businesses. It provides exposure to a wider range of sectors and industries than what is frequently seen in a standard blue-chip index.
When it comes to typical market variables like momentum, size, value, and market capitalization, the Dow 30 places more weight on pricing. As a result, the Dow 30 leaves out a number of the most successful and dynamic firms in the American stock market, including as Amazon, Alphabet, and Meta (formerly Facebook).
Illustrations of Blue-Chip Indexes
A few exchange-traded funds (ETFs) are rather good at replicating the performance of Blue chip index. Notable examples include the SPDR Dow Jones Industrial Average ETF (DIA), which tracks the DJIA, and the SPDR S&P 500 ETF (SPY) and iShares Core S&P 500 ETF (IVV), which both track the S&P 500.
As one of the earliest exchange-traded funds (ETFs), the SPY was founded in 1993 and as of July 2021, it has $380 billion in assets under management (AUM), making it one of the largest ETFs.
Launched in 1998, the DIA ETF has $30.4 billion in AUM, whereas the IVV was introduced in 2000 and has $297 billion in net assets.
Qualities of a High-Tech Enterprise
Blue chip businesses often have more robust growth over time and steady revenues, making them more resilient to economic downturns. Instead than merely being investors or fans, the general public frequently knows them as household names.
Three characteristics define a blue chip firm in the investing world. An example of a blue-chip firm is:
- renowned
- reputable
- Richly capitalized
Such a business is regarded as a pioneer in its industry and generates industry-leading products or services. Even if a business exhibits one or more of these traits, it won’t be regarded as a blue chip business if it doesn’t exhibit all three.
- Firmly established: Numerous well-known and well-funded businesses are nevertheless too young to be considered blue chips. These businesses frequently work with emerging technology.
For example, by the end of 2023, Facebook (now Meta) had 2.11 billion daily active users, making it one of the most well-known organizations in the world.
In January 2024, Facebook’s market value exceeded $1.168 trillion, indicating that the company had adequate money. But Facebook isn’t old enough to qualify as a blue chip company—it wasn’t even founded until 2004.
Because Facebook was still relatively new, there was a greater chance that it might be acquired by rivals, dismantled by authorities, or experience some other unforeseen catastrophe.
Safer
Because of their lengthy track records, blue chip companies are seen to be safer investments than other equities. These businesses have endured long enough and through a wide range of economic situations that they should be able to withstand any changes in the future.
A blue chip corporation is typically less affected by unfavorable economic conditions during recessionary periods. Coca-Cola, for instance, is a blue-chip firm that may not experience a recession since many people opt to drink its goods regardless of the state of the economy.
Throughout history, blue-chip corporations have often shown steady growth rates. As a result, their stocks are seen to be less volatile than those of other, less established businesses. However, any company’s stock can lose value and become less valuable.
Rich in Capital
A blue-chip company has to have adequate capital in two or more areas. First, as was previously mentioned, it needs to be big enough to survive a downturn. A blue chip corporation often has a market valuation in the billions of dollars. Second, in order for a business to be considered a blue chip, its credit rating needs to be high enough. Specifically, a corporation can no longer qualify as a blue chip if its debt is downgraded to junk bond status.
Even though they fit the well-known and accepted requirements, some businesses lack the funds to qualify as blue chips. These are often elderly businesses that have encountered financial difficulties. A number of reputable and well-known shops fell into this regrettable category in 2020. Both Sears and JCPenney were well-known brands with histories dating back more than a century. But after years of decline, they were not well-capitalized enough to be considered blue chip businesses.