S&P Dow Jones Indices announced the following changes to the Dow Jones Industrial Average (DJIA) effective prior to the opening of trading on Monday, August 31, 2020: Salesforce.com (NYSE: CRM) will replace Exxon Mobil Corp. (NYSE: XOM), Amgen Inc. (NASD: AMGN) will replace Pfizer Inc. (NYSE: PFE), and Honeywell International Inc. (NYSE: HON) will replace Raytheon Technologies Corp. (NYSE: RTX).

The index changes were prompted by DJIA constituent Apple Inc.'s (NASD: AAPL) decision to split its stock 4:1, which will reduce the index's weight in the Information Technology sector. The announced changes offset that reduction and diversify the index by removing overlap between companies of similar scope and adding businesses that better reflect the American economy.

We have the following observations about these changes to this historic index:

The Dow Jones Industrial Average is a price-weighted index. It is calculated by adding up the stock prices of its constituents and then normalizing the resultant value by dividing it by an index divisor. It does not account for a company’s number of shares outstanding. This is much different from a market capitalization weighted index, such as the S&P 500, that accounts for a company’s outstanding shares.

For price weighting, a high stock price has a major impact on the index while the number of shares outstanding has none. This critical difference is a major reason why just $31.5 billion in assets were linked to the Dow industrials at the end of 2019, versus $11.2 trillion that followed the S&P 500—in addition to the S&P 500’s greater diversity with 500 vs 30 companies.

The index divisor is key to maintaining the continuity of the index level following corporate actions (including stock splits) or index rebalancing. Apple’s stock split and the changes to the index’s constituents will all change the index divisor.

Apple was the highest priced stock in the Dow and consequently had a big influence on the index. Given Apple’s 4:1 stock split, its weight in the index was set to drop significantly and would have dropped the Technology sector from almost 28% of the index to 20%. The addition of Salesforce.com will raise the weighting of Technology back to 23%.

Energy was only 3% of the Dow and removing Exxon will reduce this weighting even further with Chevron now the only remaining energy stock.

Health Care was close to 15% of the index and switching Amgen for Pfizer will shift the emphasis to biotech from pharmaceuticals and raise the influence of Health Care on the index since Amgen trades at a much higher price than Pfizer.

Industrials was close to 13% of the index, but the emphasis will shift from Raytheon Technologies’ heavy aerospace exposure to a more diversified industrial exposure with Honeywell. Honeywell also trades at a higher price than Raytheon, which increases the influence of industrials on the index.

These changes will have a minor impact on the weightings of the other sector—Consumer Discretionary (14.5%), Financials (13%), Consumer Staples (9%), Communication Services (4.5%), and Materials (1%).

This report is provided for informational and educational purposes only and shall in no event be construed as an offer to sell or a solicitation of an offer to buy any securities or a recommendation for any strategy or to buy, sell, or hold any product. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. Employees of Janney Montgomery Scott LLC or its affiliates may, at times, release written or oral commentary, technical analysis, or trading strategies that differ from the opinions expressed here. The information described herein is taken from sources which we believe to be reliable, but the accuracy and completeness of such information is not guaranteed by us. The opinions expressed herein may be given only such weight as opinions warrant. This Firm, its officers, directors, employees, or members of their families may have positions in the securities mentioned and may make purchases or sales of such securities from time to time in the open market or otherwise and may sell to or buy from customers such securities on a principal basis. This report is the intellectual property of Janney Montgomery Scott LLC (Janney) and may not be reproduced, distributed, or published by any person for any purpose without Janney’s prior written consent. This presentation has been prepared by Janney Investment Strategy Group (ISG) and is to be used for informational purposes only. In no event should it be construed as a solicitation or offer to purchase or sell a security. Past performance is no guarantee of future performance and future returns are not guaranteed. There are risks associated with investing in stocks such as a loss of original capital or a decrease in the value of your investment. For additional information or questions, please consult with your Financial Advisor.


About the author

For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on www.janney.com/crs which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.

To learn about the professional background, business practices, and conduct of FINRA member firms or their financial professionals, visit FINRA’s BrokerCheck website: http://brokercheck.finra.org/