Tuesday, September 10, 2013

How Bad Is It to Get Kicked Out of the Dow?

The Dow Jones Industrial Average is just that: an average.  It is not a stock price index.  Yet it is the oldest stock market indicator in use today and as the flagship indicator of Dow Jones (Wall Street Journal, Barron's, Market Watch, etc.) it gets far more notoriety than any of the stock price indices.  When the Dow changes, it is big news.

The powers that be are kicking Alcoa ($14-15), Hewlett-Packert (c.$22), and Bank of America (c. $8) out and adding Goldman Sachs ($165), Nike ($66) and Visa ($184).  The stock prices in parentheses tell the story.  The Dow is implicitly weighted by stock price.  Companies with low stock prices have little effect on the Average, while companies with higher prices have a bigger impact.  It has nothing to do with their market capitalization, sales, or assets.

Look at the evictees and the newcomers' betas: Alcoa (1.89), Hewlett-Packert (1.64), and Bank of America (2.07) Goldman Sachs (1.85), Nike (.61) and Visa (.45). The changes appear to reduce the Dow's systematic risk.

MoneyBeat's Paul Vigna interviews David Blitzer, managing director and chairman of the Index Committee S&P Dow Jones Indices, to get the scoop:

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