Apple In Dow Would Make DIA Even Weirder

April 29, 2014

Apple’s June share split puts the spotlight on the Dow’s antiquated price-weighting scheme.

The Dow Jones industrial average is probably the best-known index in the world. Quoted constantly in all forms of media, the Dow is practically unavoidable.

Yet Apple’s potential inclusion in the Dow highlights its well-known shortcomings.

The Dow uses a stock’s price—and only its stock price—to set the stocks proportional weight in the index. The index ignores whether the firm is large or small when its sets the weight.

In contrast, almost all other plain-vanilla indexes use market-cap weighting, which measures the firm’s true size in the market. Market-cap weighting uses share price too, but scaled by the number of shares outstanding.

Apple recently announced an unusual 7:1 stock split in June, ostensibly to make its massive share price more accessible to mom-and-pop investors—and possibly to smooth its entry to the venerable Dow. Getting the stock into the Dow would force all of the index-based products to buy more Apple stock, potentially boosting or at least supporting its price.

Before we assess AAPL’s likely weight in the Dow, here’s a graph of what the current Dow looks like relative to the same 30 stocks using market-cap weighting.

DIA vs MC Current

I’m using the large and liquid SPDR Dow Jones Industrial Average Trust ETF (DIA | A-74) as a proxy, with DIA’s current weights in dark blue and hypothetical market-cap weights in light blue. (Data: DIA holdings from ETF.com; hypothetical market-cap weights calculated by me from Bloomberg values.)

Firms like Visa and Goldman Sachs dominate DIA despite their much smaller market-cap. while huge firms like Exxon-Mobil and Microsoft take a backseat.

Oddest of all: Industrial giant GE gets a huge haircut despite this being an industrial index.

 

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