Amazon will join the Dow Jones Industrial Average on Monday. Should investors care?
Amazon may attract some new interest from retail investors, says S&P Dow Jones Indices analyst Howard Silverblatt. Joining the historic index will earn Amazon “bragging rights”, with Dow companies able to say, “I am one of these now”.
Symbolic value aside, however, few institutional investors track the Dow, preferring to instead index to the S&P 500. There’s a good reason for that – the inherent silliness of the Dow. Almost all important indices are weighted by market capitalisation, but the Dow is a price-weighted index. Thus Amazon will be the 17th most-weighted stock in the 30-stock index even though its $1.75 trillion market capitalisation makes it the fifth most valuable company in America.
The most important stock in the Dow isn’t Microsoft or Apple; it is UnitedHealth Group, which makes up about 9 per cent of the index due to its higher share price. Indeed Goldman Sachs’s weighting in the Dow is more than twice as big as Apple’s even though the iPhone-maker’s $2.8 trillion market value is roughly 22 times as valuable as Goldman’s.
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Does this make sense? No. That’s why professional investors focus on the S&P 500, not the Dow.
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