Dow 30: Perhaps Time For Change

view original post


It was nearly two years ago that the Dow Jones Industrial Average announced a major shakeup. The 30 stock index would be swapping out three components for some new names, while technology giant Apple’s (AAPL) split also helped change the structure of the key market index quite a bit. As the major index’s largest component has seen its weight rise steadily recently, I believe it is time for another round of changes.

Back in 2015, I covered another re-balance of the index when credit card giant Visa (V) was about to split its stock. At that time, the name was approaching 10% of the Dow’s weight, making the index a little top heavy, as it contained a nearly 3 percentage point higher weight than the next largest Dow 30 stock. The top 5 names accounted for more than a third of the index, at 33.64%, when using weights from the SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA). As I mentioned above, part of the reason that the 2020 change occurred was that Apple had announced a split, which I believe was partly due to that name becoming too large in the index.

As we start getting a lot more significant earnings reports this week, the Dow 30 has again gotten a bit top heavy. If we look at current components based on the DIA ETF, UnitedHealth (UNH) stands alone with a weight of 11.15% as of last week’s finish. The next largest name is Goldman Sachs (GS) at 6.19%, which is a huge nearly five percentage point spread between the top two. The top five names come in at 34.27%, so all three of these key metrics are even higher than when we approached the Visa split.

If UnitedHealth continues to have this double digit weight and significant gap over number two, it only increases the chances that a stock split will be announced. An announcement like this could be paired with another one changing up the overall index, basically like we saw a couple of years ago. The reason why is the Dow’s profile has become quite a bit different from that of the S&P 500, as evidenced by the weight table against the SPDR S&P 500 Trust (SPY) as seen below. While these two indexes don’t necessarily have to match 100% in terms of sector weights, some small changes would make them a little bit more comparable.

DIA, SPY Sector Weights (State Street)

Should UnitedHealth simply split 2 for 1, the result would put healthcare back around 17.5% or so, much more in-line with its S&P 500 weight. In this case, financials would be at nearly 16%, well above its larger index composition. The technology sector would be back over 22%, but still a little underweight it seems. Of course, this is also based on the fact that Visa is currently listed as a tech name, and not a financial (or combo of the two), which might impact how some investors actually view these sectors.

One example of a possible change to the 30 stock index here could be because communication services has a much lower Dow weight. Well, it turns out that Google parent Alphabet (GOOG) (GOOGL) just underwent a 20 for 1 stock split that has the name back down to about $109, which would make it perfect for Dow inclusion. For those curious, internet and retail giant Amazon (AMZN), which also split down to around $100 recently, is listed as a consumer discretionary name.

Perhaps taking out a name like Travelers (TRV) would reduce the exposure of the financials. A second possibility would be to take out American Express (AXP), as it kind of doubles up on what Visa does, even though the two credit card names are given different sector groupings here. Likewise, one might wonder if Exxon Mobil (XOM) could get its spot in the Dow 30 back given the resurgence of energy in recent years, or a utilities / real estate name comes in for more overall balance. In this case, I’d expect a name from the industrial space to leave, as that sector after a UNH split would nearly have a Dow weight that’s nearly double that of what’s in the S&P 500.

In the end, it appears that the Dow Jones Industrial Average could be in store for a shakeup soon. It seems that a perfect way to start the process would be to have top component UnitedHealth announce a stock split at its next earnings report. Based on the split’s ratio, the Dow Committee could then decide how it wants to weight its sectors moving forward, which will determine what names are coming and going. Should we see a replacement, I’d like to see things mirror the S&P 500 a little more – which would mean at least one new tech name come in, along with an energy, utility, or real estate company, while financials and industrials could stand to lose one stock each.