The Dow Jones Index is one of the most watched stock indexes in the world. It is made up of only 30 stocks and the intent is to represent the overall US economy. Today, a broader index such as the S&P 500 with the 500 largest US companies is a better representation of the market, but the Dow is more often quoted in the financial media.
An important aspect of the Dow is that it is price-weighted. This means that rather than weighting each stock based on the size of the company, it is the highest price stock in the Dow that has the heaviest weighting.
The changes in the Dow today started with the 4 for 1 split in Apple shares after the market closed on Friday, August 28th. Stockholders received four shares for every one share owned prior to the split and the share price adjusted accordingly. If you owned 10 shares of Apple before the split, you own 40 shares after the split, but your value remains the same at approximately $5,000. Each share is priced at ¼ the previous share price.
Last week Apple stock was the highest price stock on the Dow at approximately $500 per share. Because the index is price-weighted, Apple represented 12% of the index. After the change it represents only 3%.
With the change in the price of Apple its position in the Dow changed from #1 to #18. This reduced the weighting of the technology sector as a whole. When Apple was the highest price stock, the technology sector represented 27% of the Index. After the change in Apple’s price, the technology sector represented only 20% of the index.
The committee overseeing the Index decided to make the first change in the components of the Dow since GE was removed and replaced by Walgreens (WBA) in 2018. The Dow has lagged other major indexes this year and many think it is time for a change.
Three old stocks, Exxon, Raytheon, and Pfizer were removed from the Index today, and they were replaced by Salesforce.com, a software company, Honeywell, in the industrial sector, and Amgen, a biotech firm. The addition of Salesforce.com raised the technology sector to 23% of the index, offsetting some of the impact of a lower priced Apple.
Exxon was first listed on the Dow as the Standard Oil of New Jersey in 1928. With its removal, Chevron is the only energy stock in the Dow. Exxon has not helped the Index performance in the last few years and its replacement, Salesforce.com, is a market leader.
For much of its history Raytheon has been a leader, but in the last decade Honeywell has outperformed it significantly. Likewise, Pfizer’s performance has not kept up with the broad market in over a decade, but its replacement, Amgen, is a market leader.
With these changes, it will be interesting to see how the Dow will perform in the coming months.
Nothing in this report should be considered a recommendation or solicitation to buy or sell any stock. This is intended only to be educational and informational concerning the components of the Dow Jones Index.