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Watching the Dow

6 March 2015 By Robert Cyran, Richard Beales

Apple’s entry into the Dow Jones industrial average is a bit like polishing an antique. The average share price of 30 stocks selected by committee will finally include the world’s biggest company in place of AT&T. It’s an overdue move for an outdated yardstick – one which, like landlines and checkbooks, lives on.

The fact that Apple will replace its original iPhone telecom partner in the DJIA is a reminder of the march of time, technology and, specifically, smartphones. The change will help the Dow catch up somewhat with the importance of information technology to the broader economy. But it’s a hint of the average’s antiquated construction that this was prompted by a stock split planned by Visa – a move with no real-world significance.

The DJIA dates from a simpler, computer-free era when working out the average of 30 stock prices counted as financial added value. Now it seems bizarre that anyone pays attention to a metric in which companies which have higher stock prices – but not necessarily higher market values – matter more.

The average smells a bit musty in other ways as well, including the small number of companies and the rather arbitrary nature of its selections. Apple’s growth has been the biggest story in the American market over the past decade, and the Dow has missed it. A Reuters analysis shows that inserting Apple in place of any of the 30 stocks except Visa would have made the index perform better since last June, when the iPhone maker split its stock and brought its price into a range that the DJIA committee might have deemed acceptable.

The market value-weighted S&P 500 Index and other similar but broader benchmarks are the more scientific choices – $1.9 trillion of passive investments track the S&P index, according to McGraw Hill. Yet the 128-year-old Dow remains more familiar on America’s Main Street. Apple’s arrival within it will help keep the relic going.


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