This article is written exclusively for Investing.com
Okay, maybe it's not that bad. But these are certainly strange times for the, the country's oldest measure of securities pricing. The committee that administers it has just changed the index yet again.
When the 500 stock changes things because one company goes bankrupt or is acquired or merged with another, the effect is relatively small. But when an index with only 30 stocks – and which is price-weighted rather than capitalization – does that, it looks a bit erratic. Are they just trying to catch up with the more representative benchmarks, like the S&P 500 or the?
The committee that administers the Dow Jones Industrial Average has decided to start up three of the 30 stalwarts that are relatively low-priced (well, relative to their substitutes) starting Monday.
This is certainly not the first time such changes have been made. And often it makes sense. An index must reflect current reality; it should change over time as the US changes.
For example, of the 100 largest companies in the US in 1917, only 15 survived today as members of the top 100. The others went through bad times and were swallowed up by other companies, went bankrupt or are still around. as significantly smaller players.
The 1917 Top 100 list included some household names such as AT&T (NYSE :), Exxon (NYSE :), Chevron (NYSE :), General Electric (NYSE :), Ford (NYSE :), Kodak (NYSE: ) and Sears (OTC :). It also included companies such as American Car and Foundry, Baldwin Locomotive, Willys Overland, Studebaker, Central Leather, American Woolen, and Cuba Cane Sugar. They must, of course, be changed if a company goes bankrupt, is bought by another, or fails to meet the stock exchange's listing requirements.
However, the decision to switch companies to an index of 30 companies should not be taken lightly. Is Raytheon (NYSE :), Exxon or Pfizer (NYSE 🙂 at risk of bankruptcy? Maybe someday, but that day is probably a long way off when it happens.
Why does it matter? As the DJI (or "The Dow") is still the most cited market benchmark, it thus pays more attention to the average investor who does not have time to monitor the market from hour to hour.
If someone asks, "What's the market like" or a TV host reading his teleprompter says, "Today the market ended on xyz," that's the Dow they usually report. Which is strange, because it is the least scientific index of all …
You see, the DJI is made up of only 30 US companies out of the thousands traded on the various exchanges. Furthermore, it is "price weighted" rather than market capitalization ("market capitalization") weighted, so it doesn't even reflect how many shares are outstanding at what price.
Finally, the selection of the subjects that make up it is shrouded, if not arbitrarily, in secrecy. A committee meets every now and then to decide whether the current 30 companies best represent what is happening in the investment landscape. Then the DJI components remain the same. If not, take their heads off and the committee will replace them with another company. In the past, these were viewed as decisions that were not taken lightly and often because one company was taken over by another.
But in the past seven years, nine companies have been replaced by nine others.
In 2013, Alcoa (NYSE :), Bank of America (NYSE 🙂 and Hewlett-Packard (NYSE 🙂 were replaced by Goldman Sachs (NYSE :), Nike (NYSE 🙂 and Visa (NYSE :). Good timing. The last three, all at higher prices when the switch was made, have fared much better than the first three. (Remember this is a "price weighted" index.)
In 2015, AT&T was pulled from the DJI and replaced by Apple (NASDAQ :). That has been a real coup. Apple was booming at that time. This is certainly one case where the stocks that started up would likely just keep trudging on (or working their way into a media company with mixed results so far). Apple is the darling of the Dow and the S&P 500.
In 2018 General Electric was dropped and replaced by Walgreens Boots Alliance (NASDAQ :). I'm not a fan of the basket case GE has become over the years (starting with making 600 acquisitions from success guru Jack Welch, shifting GE into emerging markets, and entering into unsustainable long-term care contracts). But what makes Walgreen & # 39; s more representative than an industrialist who has his fingers in so many pies?
Last Monday, the committee that manages the Dow Jones Industrial Average started Exxon Mobil, Pfizer and Raytheon Technologies (NYSE :). It replaced this 10% of the total number of companies in the benchmark with Salesforce.com (NYSE :), Amgen (NASDAQ 🙂 and Honeywell (NYSE :).
One of the reasons cited for this change is Apple's likely declining influence (on the index) after the impending stock split. To "the committee", this seems to mean the Dow needs more technology representation in its benchmark, so they chose Salesforce.com.
Really? Apple, Cisco (NASDAQ :), IBM (NYSE :), Intel (NASDAQ 🙂 and Microsoft (NASDAQ 🙂 make up 23% of the index. The split from Apple cuts that to about 19% – ahead of Salesforce.com. They need more technology?
What does the Dow Jones Commission say about this [Emphasis mine]?
"The announced changes help offset that reduction [as a result of Apple’s split.] They also help diversify the index by removing the overlap between companies of similar size and adding new types of companies that better reflect the US economy" . "
Question here. What "new types of businesses"? Amgen and Pfizer are both pharmaceutical companies and Honeywell and Raytheon are both aerospace and defense companies. Salesforce is tech. So much for new types of businesses.
Are these changes made because, for example, Honeywell is more representative of its industry than Raytheon? Is Amgen more representative of the pharmaceutical industry than Pfizer? Or are they just moving better from today?
If you seem like a lot of fuss about nothing, you're in good company. What to remember when we ask ourselves "What's the market like?" is that the DJI of 7 years ago was a very different index from Monday, with 9 of the 30 components changing in this short period.
In all of my articles, I will continue to cite the S&P 500 as the most reasonable measure of an investor's progress. And then only in periods of 3-5 years or longer.
Your personal measure should be, "Am I closer to achieving my goals than x years ago," not "Did I beat the Dow today? & # 39;
Disclosure: I do not know your personal financial situation. Therefore, I am offering my opinion above for your due diligence and not as advice to buy or sell specific securities.
