What Is a Blue-Chip Index?
A blue-chip index is an index that tracks the shares of well-known and financially stable publicly traded companies known as blue chips. Blue-chip stocks provide investors with consistent returns, making them desirable investments, and are considered a gauge of the relative strength of an industry or economy.
A blue-chip index is a bellwether, meaning news reports and analysts tend to emphasize the performance of the major ones, such as the S&P 500 and Dow Jones Industrial Average (DJIA), each day.
Key Takeaways
- Blue-chip stocks, which make up a blue-chip index, are desirable investments that provide investors with consistent returns.
- Blue chips have a track record of stable earnings growth and tend to pay steady dividends.
- The most notable blue-chip indexes include the S&P 500 and the Dow Jones Industrial Average.
- Investors can invest in a blue-chip index via an exchange-traded fund or index fund, rather than selecting individual stocks.
Understanding a Blue-Chip Index
Investors can invest in a blue-chip index and gain exposure to a variety of stable stocks by purchasing shares of a blue-chip-focused exchange-traded fund (ETF) or index fund. These passive vehicles give you stakes in all of a blue-chip index's constituents at a much lower cost than if you were to buy all of the individual stocks yourself.
Besides the DJIA and S&P 500, other examples of blue-chip indexes include the New Europe Blue Chip Index (NTX), which tracks 30 of the top stocks traded in central, eastern, and southeastern Europe, and the DAX Index, which tracks the top 30 companies on the Frankfurt Stock Exchange.
The term blue chip originates from the game of poker, where the highest denominated chip is colored blue. While there is no universal definition of what makes up a blue-chip company, there are several qualities each company shares.
For one thing, all blue chips have a track record of stable earnings growth and reward shareholders by issuing dividend payments with excess profits. In addition, many of the companies possess a significant competitive advantage that allows them to maintain a leadership position in a specific industry.
Special Considerations
A blue-chip index such as the DJIA tracks the performance of merely 30 stocks when the total investment universe consists of thousands of assets. Instead, investors have started to use the S&P 500—a market-capitalization-weighted index of the top 500 companies—as a benchmark for the stock market. It offers exposure to a broader array of industries and sectors that are often missing from a traditional blue-chip index.
The Dow 30 puts a greater emphasis on price rather than standard market factors such as momentum, size, value, and market capitalization. In doing so, the Dow 30 excludes some of the best-performing and most dynamic companies in the U.S. stock market, including Amazon, Alphabet, and Meta (formerly Facebook).
There are many well-known ETFs on the market, but only a handful of notable blue-chip ETFs following blue-chip indices, including the SPDR S&P 500 and iShares Core S&P 500 ETFs, which both track the S&P 500.
Examples of a Blue-Chip Index
There is a handful of ETFs that do a decent job of tracking the performance of blue-chip indexes. Notable examples include the SPDR S&P 500 ETF (SPY) and iShares Core S&P 500 ETF (IVV), which both track the S&P 500, and the SPDR Dow Jones Industrial Average ETF (DIA), which follows the DJIA.
The SPY was one of the first ETFs, with an inception date that goes back to 1993, and has grown into one of the largest ETFs with $380 billion in assets under management (AUM), as of July 2021. The IVV, meanwhile, was launched in 2000 and has $297 billion in net assets, while the DIA ETF, launched in 1998, has $30.4 billion in AUM.
FAQs
A blue-chip index is an index that tracks the shares of well-known and financially stable publicly traded companies known as blue chips. Blue-chip stocks provide investors with consistent returns, making them desirable investments, and are considered a gauge of the relative strength of an industry or economy.
What is an example of a blue chip index? ›
One of the most famous blue-chip indices is the Dow Jones Industrial Average. This index tracks 30 major blue-chip companies in the US, including Apple, General Electric and Walt Disney.
What are two examples provided that represent a blue chip stock? ›
Common examples of blue chip stocks are market leaders like IBM, Coca-Cola, and McDonald's.
How does blue chip investment work? ›
A blue chip stock is stock issued by a large, well-established, financially-sound company with an excellent reputation. Normally, such companies have operated for many years, have dependable earnings, and usually pay dividends to investors. A blue chip company typically has a market capitalization in the billions.
Is Coca-Cola a blue chip stock? ›
For example, Coca-Cola is a blue chip company that might not suffer from a recession because many choose to drink its products, regardless of economic conditions. Blue chip companies have generally demonstrated stable growth rates throughout their history.
Is Amazon a blue chip stock? ›
Amazon (NASDAQ:AMZN) is a blue chip stock best-known for its e-commerce Marketplace and its cloud computing business. Those two segments continue to be the primary drivers of the company. Their strength is the primary reason it has become a blue chip stock.
What are the best blue chip stocks to buy right now? ›
Here are five blue-chip stocks for you to consider:
- Verizon Communications Inc. (ticker: VZ)
- Realty Income Corp. (O)
- McDonald's Corp. (MCD)
- American Water Works Co. Inc. (AWK)
- Johnson & Johnson (JNJ)
Reliable Blue-Chip Stocks: Alphabet (GOOG,GOOGL)
Investors need simply look at the company's first quarter earnings report in order to understand why Alphabet continues to be a strong investment. Google search revenues surged above $46 billion during the period.
What is a blue chip stock simple definition? ›
A blue-chip stock is a stock that comes from a well-known, established company. Blue-chip stocks have a strong history of performance and often pay dividends.
Are blue chip funds good or bad? ›
Yes, blue chip funds are generally considered good investments. They focus on well-established, financially stable companies, offering stability and the potential for consistent returns. However, suitability depends on your financial goals and risk tolerance. 3.
As a result of their track records and performance histories, investors generally consider blue-chip stocks to be among the most secure stock investments.
Is Bluechip a good investment? ›
The Bottom Line
Blue-chip stocks typically have solid balance sheets, steady cash flows, proven business models, and a history of increasing dividends. For that reason, investors generally consider blue-chip stocks to be among the most secure stock investments because of their track records and performance history.
Is Netflix a blue chip stock? ›
Netflix (NFLX)
Netflix (NASDAQ:NFLX) is a blue chip stock because it is the most recognizable and successful streaming service, and it didn't get there by accident.
Is Mcdonalds a blue chip stock? ›
With a 48-year track record of dividend increases, it's no wonder MCD stock is a must-have blue chip stock for substantial gains. Moreover, analysts predict a positive outlook for the company over the next two years.
Is Starbucks a blue chip stock? ›
Starbucks may not be growing as fast as it used to, but its size and proven success has turned it into a world-class operation. It's a blue chip option for investors interested in a serviceable long-term investment idea that doesn't feature the kind of uncertainty that some upstart might have.
Is Tesla a blue chip stock? ›
The problem is that despite being included in blue chip ETF indexes, companies like Nvidia and Tesla aren't truly blue chip stocks, George Pearkes, an analyst at Bespoke, told CNN. They're much more volatile.
Is Disney a blue chip stock? ›
Is Disney stock a buy, sell or hold? Despite Disney's mixed results, analysts are still overwhelmingly bullish on the blue chip stock. According to S&P Global Market Intelligence, analysts' average target price for DIS stock is $126.48, representing implied upside of more than 20% to current levels.
Is Google a bluechip? ›
Alphabet (GOOG, GOOGL): Alphabet's non-search AI potential makes it a must-own blue chip for the long haul.
