Today, S&P Dow Jones Indices announced that they’re swapping out three companies from the Dow Jones Industrial Average Index (DJIA) – “The Dow” that everyone talks about so often when referring to the US stock market.
The DJIA is an index of only 30 stocks. It’s price weighted meaning a $50 stock has a larger weighting than a $10 stock, even though the $10 stock might be a much larger, more important company. In my opinion, it’s a very poorly constructed index, which is why I usually talk about the S&P 500 Index instead. I think the only reason they don’t change its construction is because of its long history.
The three companies removed from the Dow were Bank of America (BAC), Hewlett Packard (HPQ) and Alcoa (AA) because their stock prices were too low and only made up 3% of the total average. They were replaced by Goldman Sachs (GS), Visa (V) and Nike (NKE).
Whenever a company falters and their stock falls, they simply replace it with another company. In 2008, they removed AIG, Citigroup and General Motors. Replacing companies that are doing poorly, relatively speaking, with companies that are doing well is a formula for an index that should continually rise over time.
If you’re curious, here’s a link to the historical components of the Dow, courtesy of Wikipedia. The longest running company in the index is General Electric (GE). It was added in 1896, removed in 1898, re-added in 1907 and has been a component ever since.
-Nick
Alcoa (AA) – 5 years
Bank of America – 5 years
Hewlett Packard (HPQ) – 5 years
Goldman Sachs (GS) – 5 years
Nike (NKE) – 5 years
Visa (V) – 5 years
