A new dawn for the Dow: Apple splits and Exxon slips

Today is the day when the most well-known US stock index gets a makeover. 

The Dow Jones Industrial Average of 30 large-cap stocks is changing three of its components, replacing oil behemoth ExxonMobil (XOM), pharmaceutical firm Pfizer (PFE), and aerospace and defense firm Raytheon Technologies (RTX) with cloud-computing and software firm Salesforce (CRM), biotech firm Amgen (AMGN), and aerospace and industrial firm Honeywell International (HON).

The shift follows the announcement of Apple’s four-for-one stock split, which also occurs today.

Apple’s stock split won’t change the technology giant’s market capitalization, but will lower its share price, to reflect the additional number of shares, and so affects the firm’s position in the Dow, which is a price-weighted index. 

Apple’s reduced weighting prompted the Dow’s committee to look at the index’s composition and eliminate three companies that exemplified an older, industrial economy and replace them with companies that represent a newer, technology-heavy one, in at least two cases, to compensate for the reduced position a lower-priced Apple now has. 

The most notable departure is ExxonMobil, which was the largest publicly traded US stock by market capitalization a decade ago. More recently, the coronavirus pandemic, along with massive drilling in the West Texas Permian Basin prior to the outbreak, and a distaste among investors for owning fossil fuel companies, has put pressure on oil stocks.

Although the Dow is a well-known index taken for a market proxy, it has lagged the S&P 500 for a decade through August 30 by more than 1.3 percentage points on an annualized basis (13.88% versus 15.19%). That difference owes to the Dow’s relative lack of technology stock exposure.

For the current year-to-date period, the contrast has been more drastic, with the Dow up 2.3% and the S&P up 9.97%. Technology stocks have been racing, and the third most cited index, where many of them reside, the Nasdaq, is up 23.8% over 10 years on an annualized basis, and 24.3% for the year-to-date period.

The largest ETF that tracks the Dow is the SPDR Dow Jones Industrial Average ETF (DIA), and it has around $26bn in assets. By contrast the Vanguard S&P 500 ETF (VOO) and the iShares Core S&P 500 ETF (IVV) together have more than $380bn in assets.

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