Apple accidentally kicks out Dow's oldest member

Behind the shakeup at the world's benchmark stock index

Aug 26, 2020 | Editorial | Business | Investing
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Apple stock split causes Dow shakeup

Apple's recent 4-for-1 stock split didn't just affect shareholders and prospective investors; it also forced changes at perhaps the most exclusive benchmark index on the planet: the Dow Jones Industrial Average (DJIA). With a roster of only 30 carefully chosen companies, movements in and out of the 120-year-old index are relatively rare. But in splitting, Apple reduced its representation in the Dow (but not its $2 trillion valuation), sending the index's weighting of the information technology sector from 27.6% down to 20.3%. To mitigate these destabilzing changes, the Dow opted to add a few rising tech stars — and evict some old stalwarts.

Why are Apple's moves so important to the Dow?

Much like the bulk foods section of your local co-op, the Dow is price-weighted. As a result, companies that trade at the higher value per share have the more sway over the index, and Apple (like pine nuts) was the highest priced of them all. No other company could have had a greater impact by significantly changing its trading price, sending an index that prides itself as a solid benchmark of the broader market scrambling to keep its holdings diversified and stable.

Who's in?

Salesforce: The cloud services company built by Marc Benioff (distant cousin to Game of Thrones showrunner David) brings some much-needed tech-focused business, not to mention a 33% share price gain in 2020 so far.

Honeywell: The Charlotte, NC-based technology and aerospace conglomerate provides the Dow with plenty of tech weighting to help make up for Apple's price reduction. The addition also marks a homecoming for the company after it was kicked off the index back in 2008.

Amgen: A truncation of Applied Molecular Genetics, Amgen gives the index one of the biggest biotech players around, greater reflecting the industry's role in the modern American economy. This year, the company's share price is up nearly 18% to nearly $250/share.

Who's out?

Raytheon: The Waltham, MA-based defense contractor found itself outgunned and in the red after posting roughly 30% losses on the year.

Exxon: It's been a crude awakening for the oil company that was the Dow's oldest member. Seven years ago, it was the largest company in the world. But in 2020, all bets are off(shore), as the pandemic's curbing effect on transportation (and fuel) drilled 40% off Exxon's share price.

Pfizer: Unlike its fellow ex-Dowmates, pharmaceutical giant Pfizer's stock has barely budged more than a few percentage points this year. But with a trading price below $40/share, its influence in the index was relatively small and made it a likely candidate for replacement.

Will this change how the public invests?

While the Dow is an oft-cited source for how the market is moving, it doesn't account for all investor behavior. Just $31.5 billion in assets were linked to the Dow at the end of 2019, compared to more than $11 trillion tracking the S&P 500. So while it may be tempting to react when a major index shuffles its roster, it's important to realize that even rare shifts in the Dow won't suddenly change the way most investors across the country go about trading.


Albert

Albert

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