Amazon becomes part of US Dow Jones
Last week, Amazon was included in the prestigious Dow Jones, which was founded in 1896. This increases tea exposure in the index, which has lagged behind the S&P500 over the past 12 months due to a lower weighting towards the winning technology sector.
The Dow Jones is a lower average number of shares than the S&P 500, with only 30 components, and it is weighted by the share price instead of the total market value of companies. This causes some investors to view the Dow, which began in May 1896, as a poor representation of the US stock market.
The three largest technology stocks in the Dow Jones by market capitalization on Friday were Apple, Microsoft and Salesforce, while key companies such as Nvidia and Alphabet were excluded.
Wall Street’s blue-chip index is getting a shakeup this week that will make its list look more modern and potentially help reverse its recent underperformance.
On Monday, Amazon officially became a member of the Dow Jones Industrial Average, replacing the Walgreens Boots Alliance. Shares of the dominant e-commerce platform are up more than 80 percent over the past year, making it one of several major stocks that have pushed the S&P 500 to new highs while the Dow has struggled to keep up.
As technology has become a bigger part of the US economy and market over the past two decades, the industry-leading Dow has been constantly playing catch-up to gain more exposure to the fastest growing companies. The three largest technology stocks in the Dow by market capitalization as of Friday were Apple, Microsoft and Salesforce, while key companies such as Nvidia and Alphabet were excluded.
Amazon is officially a discretionary consumer stock, according to a widely followed classification system, but it is widely accepted as a tech giant, and its addition will help remove the gap between the Dow and the S&P.
That discrepancy has caused the Dow to underperform during the recent tech-led rally. Over the past 12 months, the S&P 500 is up 28%, while the Dow is ahead by 19%. The trailing 12-month correlation between the two averages is now below the 20 percent since 1926, according to the NDR.
The addition of Amazon does not necessarily mean that the Dow is due for a rally. In fact, history shows that stocks kicked out of the Dow often outperform their replacements, at least in the short term.
But the change may still be the right move even if only to show that the Dow, now managed by S&P Dow Jones Indices, a joint venture majority-owned by S&P Global, is moving with the times.
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