The Dow Jones Industrial Average (INDU) is one of the oldest and the most well-known stock market index in the world. The committee that manages INDU has made changes to the 30-stock components 55 times since it first started trading on 5/26/1896. Yesterday, on 8/24/20 the committee made another change to its composition adding Amgen Inc. (AMGN), Honeywell Intl (HON), and Salesforce (CRM) to replace Exxon Mobil Corp. (XOM), Pfizer Inc. (PFE), and Raytheon Technologies Corp. (RTX). The last time we had a three-component change for the index was on 9/30/13 when Goldman Sachs Group, Inc. (GS), Nike Inc. (NKE), and Visa Inc. (V) replaced Alcoa (AA), Bank of America Corp. (BAC), and Hewlett-Packard Co. (HPE).
The changes made to the Dow were prompted by the planned 4-for-1 forward stock split by AAPL, which is the most influential member of the index based on its current $500-price weight. After the split, AAPL will be less influential moving into the middle of the pack from a price-weighted basis. So, it is reasonable to expect the INDU committee current need to add more technology exposure to offset the loss of the APPL’s post-split tech-sector weighting.
Inclusion into the Dow 30 is often an important event. It is especially coveted by companies entering the blue-chip index as they receive more exposure and recognition, at least from the press and media. So, do stocks that are added to the blue-chip stock-market gauge actually outperform soon after the listing? And, do stocks that are booted from the index also underperform after the delisting?
Based on a number of studies that date back to the last 20-years, the components that have been added to the index actually perform relatively worse on a near-term basis as compared to those that left the index. Surprisingly, over the past 10-years, stocks added to the Dow have gained 0.3%, while those removed rose 10.37%.
Although past trends imply impending weaknesses for AMGN, CRM, and HON and strengths for XOM, PFE, and RTX the technicals, on the other hand, paint different pictures.