by Dan Burrows | September 14, 2012 11:11 am
In a nod to the growing importance of health care spending in the U.S., UnitedHealth Group (NYSE:UNH) will replace Kraft Foods (NASDAQ:KFT) in the Dow Jones Industrial Average after the markets close a week from today.
I guess since health care is a $2.7 trillion industry representing 18% of the economy, maybe we at InvestorPlace should have seen that coming.
Even if the rate of soaring health care costs somehow moderated, the aging of the baby boomers — those nearly 78 million Americans born between 1946 and 1964 — ensure that they’ll still only go up in absolute terms.
And it’s true that the Dow — that group of 30 blue-chip companies intended to form a sort of proxy of the broader market and economy — didn’t hold a single pure-play health insurer.
Travelers (NYSE:TRV) is the only insurance company in the Dow. The broader health care sector is represented by pharmaceutical companies Merck (NYSE:MRK) and Pfizer (NYSE:PFE), as well as diversified products maker Johnson & Johnson (NYSE:JNJ).
So, yeah, adding a health care insurer makes sense, even if we at InvestorPlace were advocating for a more modern, dynamic Dow.
After all, it was no secret that the Dow indexers would have to give Kraft the boot. The company announced it was splitting into two companies last year — a North American grocery business, to be named Kraft Foods Group, and an international snacks business called Mondelez.
The resulting company’s smaller market cap and lower revenue generated from the U.S. “makes the company less representative of the U.S. Large Cap market space,” the Indices said Friday.
Still, it’s hardly an inspiring choice. At InvestorPlace, we thought it made more sense to replace Kraft with another food juggernaut like PepsiCo (NYSE:PEP), or recognize the importance of U.S. leadership in digital products, distribution and content. That’s why we were also rooting for Amazon.com (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG) or Comcast (NASDAQ:CMCSA).
So, should you buy UnitedHealth? Well, certainly not based on its upcoming inclusion in the Dow alone.
Yes, index funds that track the Dow will need to buy up shares, but there are fewer of those than, say, S&P 500 tracking funds. I mean, since when have the “Diamonds” — the SPDR Dow Jones Industrial Average ETF (NYSE:DIA) — been a hot product? The ETF does an average daily volume of less than 5 million shares.
Besides, as InvestorPlace editor Jeff Reeves’ research shows, inclusion in a big-name index can actually be the kiss of death for a stock. The history of additions to the Nasdaq-100 (NDX) is littered with stocks that seriously underperformed after gaining entry to the club. And that big tracking ETF, the PowerShares QQQ (NASDAQ:QQQ), is hugely popular, doing average daily volume of 36 million.
Yes, UNH is a credible addition to the Dow, even if it makes the index even fustier.
But don’t go buying the stock just because it is now a certifiable blue chip. Any pop based on index inclusion alone is sure to be short-lived.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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