Dow Jones Industrial Average ETF gets a makeover
With the index changes afoot, the exchange traded tracking it will follow suit.
By Todd Shriber, The ETF Professor
Alcoa (AA), Bank of America (BAC) and Hewlett-Packard (HPQ), the Dow's lowest priced stocks, are being booted from the price-weighted index. The changes come almost exactly a year after it was announced that UnitedHealth (UNH) would replace Kraft (KRFT) as a member of the Dow (Benzinga).
Since the Dow is a price-weighted index, DIA's largest holding is International Business Machines (IBM) at 9.43% followed by Chevron (CVX) at 6.23%, according to State Street data. The combined share price of Alcoa, Bank of America and HP currently hovers around $45, meaning that trio accounts for just about 2.3% of DIA's weight.
Said another way, combined Alcoa, Bank of America and Hewlett-Packard are less than half as important to DIA's returns than United Technologies (UTX), the ETF's fifth-largest holding.
Assuming prices stay relatively static over the next two weeks, Visa would enter the Dow as the index's second-largest holding, surpassing Chevron. Visa traded around $184 as of this writing, about $62 above Chevron's share price. At around $66, Nike would usurp Walt Disney (DIS) for the number 16 spot in DIA -- if the changes were made today.
For those complaining about why Apple (AAPL) and Google (GOOG) were not asked to join the Dow (Benzinga), first think of how absurd a price-weighted index would look with a $500 stock and an almost $900 stock. Then, write a letter to those companies begging for a share split.
Actually, do not bother. If companies like Apple and Google really wanted to be in the Dow and really cared about retail investors, they would have long ago split their stocks.
Disclosure: Author does not own any of the securities mentioned here.
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