The Dow Jones Industrial Average or the Dow 30 is one of the most watched US benchmarks. Created in 1896, investors have closely tracked its performance on a daily basis for more than a century. But is it still significant or is it in need of a reboot?

The Shift from Manufacturing to Service

From 1960 to today, the service economy has grown to dominate the US economy. In 2012, the service economy made up roughly 80% of US GDP. Furthermore since the Great Recession, the service sector has accounted for over 90% of job growth.

In the New York Times infographic below, you can see the transition of the biggest 15 employers in the Dow from 1960 to 2010. As you may expect, the shift is quite pronounced and reflects the change in the overall US economy.

US economy

The Dow 30 Today: Not enough service

So does today's Dow 30 accurately represent the US economy? Let's take a look with the service companies in red.

US economy

The Dow is dramatically under representing the US service economy. Just 14 of its 30 constituents are service companies. Even if you use the current weightings of the portfolio, just over 50% of the Dow is service.

I believe this is a big mistake and will likely cause the Dow 30 to lag many other indices. I wouldn't be happy with this low an exposure to the most dynamic part of the US economy. Service companies have many positive attributes that are compelling reasons to slant your portfolio toward, or even invest exclusively in, service companies.  If you do not wish to take my word for it, read this quote from Jack Welch, former Chairman and CEO of General Electric:

We were being threatened at that time by Japanese competition in manufacturing. So we definitely had to get into services. We had to get away from products and move to greater financial services, product services, and networks/entertainment – as a services business provided great cash flow.

You are much better off moving up the food the chain, constantly innovating, fighting your way out of a me-too product. If I am an investor, I should be trying to figure out if a company has a unique competitive advantage.

How much of your investment portfolio is in service vs manufacturing?