The Dow Jones Industrial Average has existed for 125 years and is one of the most widely recognized stock market indexes in the world.
While many investors believe the purpose of the index is to generally represent the U.S. economy, in fact that’s true only in broad strokes. Originally it was just industrial companies (hence the name), but now other sectors of the economy are reflected in the 30 stocks that make up the Dow.
Yet despite technology companies being present in the index, one name you won’t see there is Amazon (NASDAQ:AMZN), even though it is arguably one of the businesses most integral to the tech sector and to the economic health of the country as a whole.
The one constant is change
The Dow Jones Industrial Average is a fluid index. Its components having changed about 60 different times over its history, or about once every two years.
Although most changes Dow Jones makes to the index make sense, at other times not so much. For example, salesforce.com (NYSE:CRM) was added to keep up the technology component of the index after Apple (NASDAQ:AAPL) split its stock 4-for-1 and ExxonMobil (NYSE:XOM) was removed.
Although Dow Jones explained at the time that the changes helped “diversify the index by removing overlap between companies of similar scope and adding new types of businesses that better reflect the American economy,” salesforce.com is hardly more representative than Amazon.
Not only are Amazon’s e-commerce operations essential to tens of millions of consumers, but its cloud computing division, Amazon Web Services, is also the digital backbone to hundreds of corporations, educational institutions, nonprofits, healthcare facilities, and even the U.S. and foreign governments.
That means the Dow is not really representative of today’s digital economy, and this explains why the Dow badly trailed the performance of the S&P 500 and Nasdaq exchanges last year. While the Nasdaq gained 24% and the S&P 16%, the Dow rose just 7.3% in 2020.
Carrying the weight
Today, Salesforce’s valuation has grown to almost $210 billion (about equal to Exxon’s), which makes it the 15th biggest stock on the Dow Jones index.
But because the Dow is a price-weighted index, not market-weighted, the tech stock’s $225 share price means it’s actually the sixth most expensive stock, representing 4.79% of the index’s weighted total.
That also explains why Amazon isn’t in the Dow Jones Industrial Average and likely never will be.
|Dow Stock||Price||Market Cap||% Weight|
|American Express||$126.14||$102.92 billion||2.68%|
|Goldman Sachs||$289.39||$101.84 billion||6.14%|
|Home Depot||$284.00||$297.71 billion||6.03%|
|Johnson & Johnson||$163.55||$431.49 billion||3.47%|
|JPMorgan Chase||$133.79||$415.26 billion||2.84%|
|Procter & Gamble||$130.00||$323.46 billion||2.76%|
|Travelers Companies||$145.84||$36.71 billion||3.10%|
|UnitedHealth Group||$347.55||$329.04 billion||7.38%|
|Walgreens Boots Alliance||$47.45||$41.33 billion||1.01%|
|Walt Disney||$172.78||$316.45 billion||3.67%|
When Apple split its stock, Dow Jones explained the change “will reduce the index’s weight in the Global Industry Classification Standard (GICS) Information Technology sector.” It needed a tech stock to offset that, which is why it chose Salesforce.
Had it added Amazon to the index, its $3,300 share price would have dramatically skewed the benchmark in its favor. Any movement made by the stock would account for all of the index’s action that day. And Amazon isn’t likely to split its stock anytime soon, if ever.
The digital giant split its shares thrice in the 1990s after going public, keeping the stock below $100. But over the ensuing decades as the shares’ value ran higher, Amazon chose not to divide them up.
Now that its business has grown far beyond its humble roots as an online bookseller, the need to be friendly to retail investors isn’t an imperative. Besides, Amazon would have to split its shares by 10-to-1 or more to reduce them to a level at which Dow Jones would even consider it.
Amazon may be one of the more important straws that stir the nation’s economic drink, but that doesn’t mean the tech stock will find its way into what remains to many the most important stock index today.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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