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  • Writer's pictureIshfaaq Peerally

Big Changes to the Dow Jones Index Coming

Apple $AAPL is undergoing a 4-1 Stock Split next week and since Apple is the largest component of the Dow Jones Industrial Average $DJ30 , it has to be adjusted too with ExxonMobil $XOM its oldest component being removed.

The Dow Jones is the oldest and most known index in the world although investors prefer looking at the S&P 500 $SPX500 . The S&P 500 is weighted according to market cap, the larger the company, the more will be its weight on the index. The Dow Jones is weighted by price. Thus, even though Home Depot is much smaller than Microsoft, on the index, it has a higher weighting.

With the Apple stock split, the stock will move from 1st place to 17th. That's why these changes are required but they look strange. Dropping ExxonMobil was a surprise to me. Now the only oil stock on the Dow Jones is Chevron. Does it mean that the oil industry is expected to have less impact on the economy and markets in the future? And if the future is tech, then replacing an oil company with Salesforce $CRM makes sense. Salesforce is not a stock paying dividends, therefore, this move by Dow Jones is big cultural shift for the index.

Pfizer is being replaced by Amgen $$AMGN . A shift from traditional big pharma to biotech. And Raytheon Technologies is being replaced by Honeywell. Honeywell is more diversified than Raytheon and Raytheon was only added after merging with United Technologies.

Short-term, the Dow Jones may be affected as the gains of Apple will be less reflected on its performance but long-term, I don't think it matters that much. But these changes have cultural importance. We can see a cultural shift in the Dow Jones. Are we going to see more tech companies in the future?

In 2011, ExxonMobil was the largest company in the world and as the largest descendant of John D. Rockefeller's Standard Oil, it is being removed. GE was recently removed. This is what is great about American Capitalism. Nobody is safe. This is creative destruction (coined by Joseph Schumpeter) or Entrepreneurial Capitalism. In Europe, the same big companies which were here 50 years ago are still here today (Big Firm Capitalism). That's why I always say that even if stocks in the US are expensive, you can always find good opportunities if you know where to look.

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