For a lesson in the pitfalls of market timing, consider the Dow Jones Industrial Average, whose refusal of admission to Alphabet Inc. and Amazon.com Inc. has gone from a blessing to a curse in the space of a year.
All but barred for inclusion until splitting their stocks in 2022, the trillion-dollar behemoths have become the benchmark’s most eligible absentees, with their influence felt over vast swaths of American commerce. Keeping them out was a boon for passive owners of the Dow in last year’s tech wipeout, walling them off from the trouncing suffered by the S&P 500 and Nasdaq 100.
Yet in this year’s artificial-intelligence-driven surge, their absence is conspicuous. The 30-stock gauge has climbed 5.3% in 2023, trailing the others by double-digit percentages.
Now, with three years passed since the last Dow reconfiguration, speculation that the duo’s day has come is being heard again. To some, including Richard Moroney, chief investment officer at Horizon Investment Services, the time may be ripe for a culling with potential stragglers including Walgreens Boots Alliance Inc., Verizon Communications Inc. and Intel Corp.
“At current prices, these stocks have very low weightings in the price-weighted Dow,” said Moroney, who is also the editor at Dow Theory Forecasts, an independent investment adviser. “WBA and VZ operate in industries that no longer seem so central to the US economy.”
A representative for S&P Dow Jones Indices declined to comment.
More than a century after its founding, the Dow has ceded its preeminence as an investor benchmark, though it remains the most exclusive register of American corporate elites. As such, its additions and deletions are a litmus for industry trends. Unlike the S&P 500, there are no set rules for inclusion. “A stock typically is added only if the company has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors,” according to its overseers’ website.
“It just follows a very different pattern. And it’s much, much more stable and have much lower turnover than the other indexes,” Christopher Harvey, head of equity strategy at Wells Fargo & Co., said by phone. “Part of it is it just doesn’t want to get caught up in the flavor of the day. It’s okay to be unfashionable for periods of time.”
Among over 3,000 exchange-traded funds in the US, only one use the DJIA as a benchmark — the $29 billion SPDR Dow Jones Industrial Average ETF Trust (ticker DIA), according to Bloomberg Intelligence’s James Seyffart. That compares with roughly $1.1 trillion invested with multiple S&P 500 ETFs and over $222 billion tracking the Nasdaq 100.
“The Dow is an interesting benchmark, but it is not really used by our institutional client base,” Steven DeSanctis, equity strategist at Jefferies, said by phone. “Obviously, the S&P 500 is the one that’s important. The Nasdaq has gotten important.”
Amazon and Alphabet’s stock splits were viewed as a necessary concession to the Dow’s methodology, which weights the influence of stocks by their share price rather than market capitalization. Both companies trade for less than $200 following the action. They used to go for more than $2,000.
“I’ve looked through the methodology. I don’t see anything explicitly that would preclude them from being included outside of price,” Matt Bartolini, head of SPDR Americas Research at State Street Global Advisors, said by phone referring to the two tech giants. “In the periods of really rampant uncertainty, those blue-chip stocks that have immense brand value, maybe those are the ones you want.”
Gauges such as the Dow are built as representative benchmarks, not actively managed funds. As such their bouts of underperformance versus other indexes are of no theoretical consequence to overseers. Still, it’s hard to miss the degree to which the 127-year-old average has trailed in 2023 due to both the composition and weighting of its technology holdings, which include relative market duds like IBM Corp.
“A case could be made that yesterday’s blue chips and today’s blue chips are not as well-represented as they could be,” Horizon’s Moroney said. But for perhaps a fairer comparison, he points to the S&P 500 Equal Weighted Index (SPW) — the equal-weight version of the widely-used S&P 500 — which is up just 4.9% year-to-date. Its performance is much more comparable to the DJIA. “So is the outlier the S&P 500 or is it the Dow?”
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