At long last, the world’s most valuable company will be included in the world’s oldest, most illustrious stock index.
And … that’s about it.
The Biggest Non-News Event of the Day
Apart from making the blue-chip Dow Jones a somewhat better reflection of the U.S. economy, this change has almost no bearing on Apple stock or even AT&T stock. Inclusion and exclusion from the Dow Jones have very little bearing on a stock’s performance because so little capital is actually indexed to it. (More on this in a bit.)
A Dow without Apple didn’t make a lot of sense to most observers. AAPL is the largest company by market capitalization, and it holds a dominant place in an industry which has become singularly important to the U.S. economy.
Heck, Nike Inc (NYSE:NKE) is a member of the Dow Industrials (it hasn’t been an industrial average in decades now), and that’s a consumer-facing company with tremendous brand equity. Apple is much bigger and — thanks to technological innovation — far more important.
Oh, and Microsoft Corporation (NASDAQ:MSFT) is in the Dow Jones.
At the same time, losing AT&T isn’t going to make the Dow any less useful as a broad barometer for the market and economy. Telecommunications companies haven’t been at the forefront of innovation or growth in a long time, and the sector is ably reflected by the Dow’s Verizon Communications Inc. (NYSE:VZ).
By the way, professional investors don’t pay much attention to the Dow. As much as it has become a quick-and-easy way to refer to the U.S. stock market, only civilians use it. When pros talk about the U.S. equity market, they’re talking about the S&P 500. When investors want to buy the market, they buy products indexed the S&P 500, such as SPDR S&P 500 ETF Trust (NYSEARCA:SPY).
And because the market is the S&P 500, a vast amount of capital is invested in various products that track it.
Just look at the combined capital of the major ETFs tracking the indices. Nearly $300 billion is invested in three major S&P 500 trackers — the SPY, the iShares S&P 500 Index (ETF) (NYSEARCA:IVV) and the Vanguard 500 Index Fund (NYSEARCA:VOO). The only Dow-tracking fund, the SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA), holds just more than $12 billion in assets.
Meanwhile, the SPY — one of the most popular ways to “buy the market” — does average daily volume of about 135 million shares. The DIA does average daily volume of … 6 million.
When a company gets included in the S&P 500 — or kicked out — cash flows into or out of index products that have to match the index. That effects demand for the stock getting the nod or the boot. The Dow? It’s not really enough cash to care about one way or the other.
Furthermore, the company that owns the average — S&P Dow Jones Indices — even said Apple’s inclusion won’t change the current level of the Dow when it joins later this month.
AAPL in the Dow: It’s Finally Cheap Enough
So why did it take so long for the keepers of the Dow Jones Industrial Average to make Apple one of its members, an elite list of just 30 companies?
It’s because unlike almost every other index, the Dow is weighted by share price, not market capitalization. Before the Apple stock split, shares were trading at such elevated prices that it would have totally distorted the Dow Jones. Indeed, the Dow would have become the Apple-and-some-other-stuff index.
But now that AAPL trades in the low double digits, it can take a place in the Dow without unduly influencing its movements.
Once Apple split its stock, it was only a matter of time before it was tapped for the Dow Jones Industrial Average. After all, with market cap of about $750 billion, it’s the biggest stock in the market by far.
As for being tagged as an honest-to-goodness blue-chip stock, that’s nice and all, but it doesn’t change the prospects for Apple stock.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.