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The Dow Jones Is Getting Revitalized
September 22, 2008
SAN DIEGO (ETFguide.com) – It doesn’t happen with any predictable regularity and it doesn’t happen often. When it does happen however, it is kind of a big deal – changes to the Dow Jones.
As of September 22, 2009 (prior to the opening) Kraft Foods (NYSE: KFT) will replace American International Group (NYSE: AIG). Dow Jones said in a statement that the change was forced by the effective nationalization of AIG and its very low stock price. Having to borrow $85 billion from the U. S. Government must have disqualified AIG from being considered a blue chip stock.
Why Kraft?
Replacing a global financial conglomerate with Kraft, a food company, leaves the Dow Jones underweighted in financials compared to other indexes like the S&P 500 (9.46% vs. 15.32%).
Confronted with the issue, Robert Thomson, managing editor of the Wall Street Journal stated: “We are refraining at this point from adding another stock in the financial industry because of the extremely unsettled conditions. We realize this decision leaves the Dow Jones Industrial Average under-weighted in financials, and we will address this situation in due course.” Mr. Thomson further explained: “We are adding Kraft because the Dow Jones Industrial Average had no representation in food products. Kraft is one of the world's leading food companies''.
Prior changes:
At around $4/share, AIG made up only 0.20% of the Dow Jones Average, compared to around 5% a year ago. The addition of Kraft Foods is only the fifth change in this century. In 2004 Verizon (NYSE: VZ) and Pfizer (NYSE: PFE) were added to the average.
On February 19, 2008 Bank Of America (NYSE: BAC) and Chevron (NYSE: CVX) replaced Altria (NYSE: MO) and Honeywell (NYSE: HON). No other year has seen as many changes in the Dow as 2008.
How components are selected:
Composition changes are rare and generally occur following corporate acquisitions or other dramatic shifts in a company’s core business. When such an event necessitates that one component be replaced, the entire average is reviewed.
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Constituents are selected by the editors of The Wall Street Journal. A stock typically is added only if the company is widely known, demonstrates sustained growth, is of interest to a large number of investors, and accurately represents a market sector covered by the average.
Interesting facts about the Dow Jones:
The Dow Jones Industrial Average is the second oldest continuous barometer of the U. S. Stock market (the oldest is the Dow Jones Transportation Average). The average consists of the 30 largest and most widely held public industrial companies in the United States (excluding transportation and utilities). The definition of industrial is kept intentionally broad to provide an indicator that reflects the performance of the entire economy.
The “Dow” is appropriately called an average and not an index. Being price weighted, the Dow Jones Averages can be considered the world’s first fundamentally weighted market indicators. The composite value is derived by adding the stock prices and dividing it by the number of components. A 'divisor' adjusts the effects of stock splits and other composition changes.
Dow components as of 9-22-2008 (sorted by weight):
International Business Machines – IBM
Chevron - CVX
Exxon Mobil - XOM
Procter & Gamble - PG
Johnson & Johnson - JNJ
3M Company - MMM
Caterpillar - CAT
McDonalds – MCD
United Technologies - UTX
Wal Mart Stores – WMT
Boeing - BA
Coca Cola – KO
Hewlett Packard – HPQ
Du Pont – DD
JP Morgan Chase – JPM
American Express – AXP
Walt Disney – DIS
Verizon – VZ
Kraft Foods - KFT
Merck & Company – MRK
Bank Of America – BAC
AT&T – T
Home Depot – HD
Alcoa – AA
Microsoft – MSFT
General Electric – GE
Intel Corp – INTC
Pfizer – PFE
Citigroup – C
General Motors – GM |
