Tags: Goldman | Nike | Visa | Dow

Dow Index Announces Biggest Shake-Up in Decade

Tuesday, 10 Sep 2013 09:02 AM

In the biggest shake-up of the Dow Jones Industrial Average in nearly a decade, Goldman Sachs, Visa and Nike will join the blue-chip index, replacing three companies whose stock prices were considered too low, including Alcoa, which ends more than half a century of membership.

The three companies — an investment bank, credit card payment processor and apparel company, respectively — will also replace Bank of America Corp., Hewlett-Packard Co., along with Alcoa in the 30-stock average, the index managers said Tuesday.

The changes will take effect at the opening of trading September 23, said S&P Dow Jones Indices, whose index committee makes decisions on the make-up of the average.

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Opinion: Retirees to Be Hit With Social Security Cuts

With the changes, the committee again passed on a chance to include Apple Inc. and Google Inc., the first- and third-largest U.S. companies by market value. Apple stock trades above $500 and Google closed Monday above $888.

Google and other names were considered for inclusion but passed over in part because of their high stock prices, David Blitzer, managing director and chairman of the S&P Index Committee, told CNBC.

The Dow is still considered Main Street's view of the stock market, even though its methodology — weighting stocks by their price, rather than market value — has kept out the likes of Google or Apple, arguably two of the most important companies in the U.S. economy presently.

Even though S&P Dow Jones Indices classifies Visa Inc as a technology name, adding the nation's largest credit-card processor along with Goldman Sachs Group Inc. reflects a further tilt toward financial services.

Nike Inc.'s addition marks the first inclusion of an apparel maker since International Shoe was replaced in 1933, according to S&P Dow Jones Indices records.

Following the announcement, Visa shares were up 2.7 percent at $183.44, Goldman rose 3.3 percent to $164.70 and Nike added 1.5 percent to $66.37 after earlier hitting $66.98, a record intraday high. The Dow was up 0.6 percent on the day.

The average, first established in 1896, includes 30 stocks, but very little money is indexed to its performance, unlike the broader S&P 500.

Funds that attempt to replicate major indexes make up a large part of the U.S. stock market.

Because they are designed to mimic market performance at a low cost, they have become among the most popular investment vehicles for investors.

The Dow's 30-stock membership is generally considered too few for a broad-based mutual fund, and the priced-weighted design is considered problematic because smaller companies with higher share prices can exert a disproportionate influence.

"Wow — those are big changes," said Tim Ghriskey, chief investment officer of Solaris Group in Bedford Hills, New York.

"The Dow is really an antiquated index. It is price-weighted, which makes no sense. But there are still are some people that pay attention to it, and some technicians, so it has an influence on some people."

Presently, IBM, the highest-price stock in the average, accounts for more than 9 percent of the index, while Exxon Mobil Corp., ranks eighth in terms of price weighting. By market value, however, the two are reversed — Exxon is the largest, and IBM would rank eighth.

The additions of Visa and Goldman partly tame the heavy influence that IBM exerts. With the move, IBM's weighting in the Dow will drop to about 8 percent from 9.4 percent, and Visa and Goldman will account for 7.7 and 6.9 percent of the average, according to Birinyi Associates.

The SPDR Dow Jones Industrial Average ETF, a trust that tracks the Dow's performance, has net assets of $11.9 billion, ranking it in the top 30 among U.S. ETFs, according to Thomson Reuters data. The largest ETF, the SPDR S&P 500 ETF, has $143.9 billion in assets.

In volume terms the Dow ETF, previously known as the Diamonds Trust, ranks 35th among the most actively traded ETFs with a 50-day average of 5.4 million units exchanging hands.

The SPY averages 106 million shares traded daily, but the Diamonds carry similar volume pull as other widely-followed ETFs like the SPDR S&P Homebuilders ETF.


The three stocks slated to join the Dow have outperformed the blue-chip index's 14.9 percent gain in 2013 to Monday's close. Visa had gained 17.8 percent, Goldman 25 percent and Nike 26.7 percent.

Of the stocks that will leave, only Alcoa had underperformed the index, with a 6.9 percent year-to-date drop to Monday. Bank of America was up 24.8 percent and HP had jumped 56.9 percent.

Alcoa, which said being dropped from the Dow would not affect its ability to carry out its strategy, has been seen as a candidate for elimination for some time, as the stock's value of $8.7 billion is easily the lowest in the average.

The second-lowest market cap currently is Travelers, at $30.7 billion.

It is the first three-for-three change to the index since April 8, 2004, when American International Group, Pfizer and Verizon replaced AT&T Corp, Eastman Kodak and International Paper.

The changes are the first in nearly a year, when UnitedHealth Group replaced Mondelez International.

Editor’s Note: Opinion: Retirees to Be Hit With Social Security Cuts

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The Dow Jones industrial average is dropping Bank of America, Hewlett-Packard and Alcoa, its three-lowest priced stocks, as part of a six-company shakeup of the most widely known barometer of the U.S. stock market.

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