Chances are high that you already have heard that the Dow Jones Industrial Average (DJIA) is making a serious change among its 30 constituents. What you might not have heard outside of the changes is that this component rebalancing and replacement act will make five or six of the DJIA components that were not removed from the index close to irrelevant in the daily “stock market” moves when it pertains to the DJIA itself.
The three companies getting the boot from the DJIA are Alcoa Inc. (NYSE: AA), Bank of America Corp. (NYSE: BAC) and Hewlett-Packard Co. (NYSE: HPQ). The new DJIA stocks will be Goldman Sachs Group Inc. (NYSE: GS), Nike Inc. (NYSE: NKE) and Visa Inc. (NYSE: V).
So, back to what you might not have heard. First and foremost, the DJIA has been a price-weighted index based solely on each company’s stock price. The more broad S&P 500 Index is a market cap-weighted index, making the share price irrelevant. The S&P 500 index is how almost all new index measurements are made, and the DJIA calculation is considered an old-school calculation. That being said, it is the DJIA reference that everyone makes when they say “The Stock Market” was up or down.
What drives the point home here is that Alcoa, Bank of America and even Hewlett-Packard all had incredibly low share prices. Visa and Goldman Sachs both have share prices north of $150, which will make them close to almost as high of a weighting as International Business Machines Corp. (NYSE: IBM) with its $180+ share price. Chevron Corp. (NYSE: CVX) will drop from the second highest weighting with its $122 or so price down to the number four spot amont the 30 DJIA stocks.
We have taken pre-adjustment weightings from IndexArb.com to illustrate the changes, but be advised that these weightings likely will slide even further now that they are the lowest priced stocks among the DJIA.
We are keeping the weightings open because the adjustment is 10 days out and some stock prices will rise while others may fall. Here are the six DJIA components that stayed on the DJIA that now will be irrelevant when it comes to the DJIA daily moves.