We have Charles Martin Hall to thanks for many major
industrial advances of the 20th century. His discovery of the
process of aluminum smelting produced many breakthroughs in food
services, packaging, automobiles and aerospace.
But Hall and the company he founded are no longer held in such
high esteem on Wall Street.
has just been asked to pick up its things and leave the Dow Jones
Industrial Average (DJIA).
Bank of America (
have also been shown the door.
I noted the possibility of these changes last year, predicting
that Alcoa and HP were headed for the exits. I also thought
would be given the boot, though the ongoing troubles at Bank of
America made that financial services firm more vulnerable. The
fact that BofA has more than five times the market value of
Travelers was apparently of little concern. (And the fact that
Travelers was added to the index only four years ago likely meant
that it was too soon for a change of heart anyway.)
However, my predictions regarding which companies would join
the Dow were off the mark. The addition of
Goldman Sachs (GS)
suggests a clear move to boost the Dow's global exposure -- but I
remain stunned that
Apple (Nasdaq: AAPL)
is not yet a member of the Dow. A $450 billion market value and a
$170 billion revenue base is pretty hard to ignore.
I'd add that
Wells Fargo (WFC)
Berkshire Hathaway (NYSE: BRK)
Oracle (Nasdaq: ORCL)
would have made worthwhile additions as well. They presumably
remain on the short list when the Dow is again reshuffled in a
What It Means For Investors
So how does the changing Dow affect investors? For starters,
investors in exchange-traded funds (ETFs) that are based on the
Dow, such as the
SPDR Dow Jones Industrial Average (DIA)
, now have incrementally better exposure to most dynamic aspects
of the U.S. economy. (Despite its myriad industrial uses,
aluminum is not an especially profitable business, and HP's
computers are losing relevance.)
Companies that are added to the index can also see a quick
share price boost (and the bragging rights don't hurt, either).
Goldman Sachs, Visa and Nike all jumped 2% to 3% on news of their
inclusion. The Dow rejects, on the other hand, didn't fall at a
similar pace. Investors likely saw these exits coming.
We can assume that this group will remain constant for at least a
few years, unless any Dow components get merged out of existence.
Recently, the Dow's strategists have tended to only make a
cluster of changes every three to four years:
- 1997: four companies replaced
- 1999: four companies replaced
- 2004: three companies replaced
- 2008: three companies replaced
- 2009: two companies replaced
- 2012: one company replaced
- 2013: three companies replaced
- 2016: ???
Frankly, that's a lot of turnover in a 16-year stretch,
reflective of the rapid changes taking place in the global
economy. The newly constructed Dow shows a clear reflection of
the kind of companies leading the global charge these days:
- Five financial services firms:
American Express (AXP)
, Goldman Sachs,
JPMorgan Chase (JPM)
, Travelers, Visa
- Five technology firms:
Cisco Systems (Nasdaq: CSCO)
Intel (Nasdaq: INTC)
Microsoft (Nasdaq: MSFT)
- Six industrial firms:
General Electric (GE)
United Technologies (UTX)
- The remaining 14 firms are spread among the energy,
telecom, consumer discretionary and health care sectors.
Action To Take -->
There's no question that the Dow Jones Industrial Average just
became a more relevant index for the U.S. economy. Yet the fact
Google (Nasdaq: GOOG)
Amazon.com (Nasdaq: AMZN)
are all excluded means that the Dow planners have an outdated
view of what drives the economy.
Then again, investors can gain ample exposure to these firms
through Nasdaq-focused ETFs. It's smart to make sure you have
exposure to both the Dow and the Nasdaq for true long-term
portfolio diversification. Is the Dow or Nasdaq a better
investment for the near-term? Well, roughly a month ago, I made
the case that mega-caps, including many companies residing in the
Dow, hold relatively strong appeal right now.
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