In its biggest shakeup since 2004, the Dow Jones industrial average is dropping its three lowest-priced stocks — Bank of America, Hewlett-Packard and Alcoa — and replacing them with Goldman-Sachs, Visa and Nike.
The 30-company index, seen as the barometer of the U.S. stock market, is meant to reflect the composition of the wider U.S. economy. The Dow is a price-weighted index, which means its value is based on the price of a company's stock rather than its market value.
The changes, to take effect Sept. 23, won't affect the value of the index itself, according to the small committee that made the decision to alter the company mix of the index.
The companies being dropped from the index are:
- Bank of America: It's America's biggest bank and has been on the Dow since 2008, but it's still recovering from the 2008 financial crisis. Although its stock has had a huge boost in the past year, it is still hovering just above $14.
- Hewlett-Packard: It was the Dow's second technology stock when it joined in 1997, but it no longer dominates in any field. It is in the midst of restructuring after a poor acquisition.
- Alcoa: The aluminum producer has the lowest-priced stock on the Dow, at about $8 US, and is struggling through a global slowdown in demand for aluminum. Its removal reflects the reduced reliance on industrial manufacturing in the overall economy.
The companies that will replace them are:
- Goldman-Sachs Group Inc.: The Dow is swapping one financial company, Bank of America, for another with a higher stock price. Goldman Sachs is considered to have weathered the financial crisis better than its peers.
- Visa Inc: Visa, like HP, is considered a technology-related stock. Although it is known as a credit card issuer, it also has a technology focus through its payment processing business.
- Nike Inc.: The committee felt there were too few companies reflecting consumer spending and no apparel representation in the Dow. Nike is big, well-known and stable, with huge business in the U.S.
The Dow removes low-priced stocks because they do not have any influence on a price-weighted index. Similarly, it avoids high-priced stocks, such as Google, which trades at nearly $900, and Apple, whose shares are priced around $500, because any movement in their prices could unduly sway the index.
The Dow is meant to reflect the big-cap sector of the market, but average stock price is about $65.
As it has adjusted to the shifting industry make-up of the American economy, the index average has moved away from industrial stocks and taken on more pharmaceuticals, technology and financial services.
Very few investors or even index funds actually structure their portfolios around the Dow. Most prefer to use the S&P 500, which is a far broader representation of the market.
About 1,338 funds, worth $3.087 trillion, track the S&P, according to data from the financial research firm Morningstar. The Dow, by contrast, has six funds worth $195.5 million.