What would the Dow look like if it included Apple?

By Reuters

Mar 03, 2015 07:36 AM EST

It may be by far the most valuable American company but Apple Inc still can't get into at least one exclusive club - the 30-member Dow Jones Industrial Average.

That may not be a problem for the company behind the iPhone and the iPad, after all Apple shares recently hit record highs. It is, though, hurting those who tie their investments to the performance of the venerable Dow, which was first calculated in 1896 and is still probably the best-known stock index in the world.

Since Apple split its shares seven-for-one last June 6, it's delivered investors a gain of more than 43 percent including dividend payments, and that has contributed almost one third of the Nasdaq 100's return of 18.6 percent, according to ETF.com. By comparison, the Dow's total return has been only 8.97 percent over that period, and it has also underperformed the S&P500 - which does include Apple - and has a 9.56 percent return. 

Had Apple been substituted for 29 of the 30 Dow components last June, the index would have been higher. The only Dow member that would have had more of a positive influence on the index than Apple is Visa. If Apple had replaced a badly lagging stock such as IBM, which has dropped more than 13 percent since Apple's split, the Dow would now be about 450 points higher than its Friday close at 18132.70 (and have gained 9.8 percent rather than the 7.1 percent increase it has recorded, without dividends).

(For an interactive graphic on how if Apple had been substituted for almost all of the Dow's 30 components, the index would be higher, click here: reut.rs/1DK9ra0)


So why can't a company that so dominates the consumer and technology worlds, and whose share price has climbed an astounding split-adjusted 3,500 percent since January 2000, get into an index that has gained just 55 percent in that period.

S&P Dow Jones Indices, a unit of McGraw Hill Financial Inc, rarely makes changes to the index it owns, and often only when forced to by a major corporate event, such as an acquisition of a component.

The last change was in September 2013, when Alcoa, Hewlett-Packard and Bank of America were replaced by Visa, Nike and Goldman Sachs in one of the biggest shake-ups in the index for some years.  That decision was triggered by the low stock prices of the three companies that were removed and by a desire to diversify the industry groups in the index, according to a statement from S&P Dow Jones Indices at the time.

"S&P doesn't comment on any pending index changes with respect to any specific companies," said David Blitzer, managing director and chairman of the index committee atS&P Indices in New York.


According to S&P Dow Jones Indices' guidelines on its website, a stock "typically is added to the index only if the company has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors." Apple would certainly qualify on those criteria.

In addition, S&P Dow Indices says that "adequate sector representation within the indices is also a consideration in the selection process."

As of the end of January, 9.47 percent of the Dow was allocated to the technology sector, placing it fifth among the nine sectors that comprise the index. Given that technology makes up 19.9 percent of the broader S&P 500, that should also help Apple's case. And given Apple has also more than earned its stripes as a consumer and media company it clearly has other claims on membership.

Before June last year, it would have been much more difficult to add Apple because pre-split, the stock was trading at such a high price - it reached $705 back in 2012. The Dow is a price weighted index, which means a stock with a higher price has a greater influence on the index. By contrast, the S&P and Nasdaq indexes are weighted by market capitalization.

Many investors who tie their investments to a broad index will use the S&P 500 ($1.9 trillion of index funds) or the Nasdaq 100. But some do buy the Dow through vehicles such as the SPDR Dow Jones Industrial Average ETF, which has a market value of about $12.32 billion and is known as the Dow Diamonds. There are also leveraged funds that seek to double or even triple its gains, such as the ProShares UltraPro Dow30.   

Followers of the Dow have to get used to some odd influences because of its structure. For example, a 1 percent move in an index member like Visa with a share price of $271.30 has more than 10 times the impact of a similar change in a fellow Dow member such as General Electric Co, with a stock price at $25.99.

Visa has risen 28 percent since the June split, lagging Apple, and has less than a quarter of Apple's  market value. However, it still contributed more to the index gains than Apple would have in its place because Visa's shares are priced so high. That will change on March 18 when Visa itself does a four-for-one stock split.

And the shares of two Dow components have just about matched Apple's performance since last June with gains of about 42 percent each before dividends. But the impact of the two, Home Depot and UnitedHealth Group Inc, on the index is less than if they were replaced with Apple, this time because Apple's $128.46 closing share price on Friday is a bit higher than theirs.

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