In somewhat of a surprise move, it has been announced that the ultra-popular Dow Jones Industrial Average will be swapping a few of its components. In fact, three companies will be shifted out of the 30 stock benchmark, making room for a new trio of companies.
The three companies on their way out include Alcoa (AA), Bank of America (BAC), and Hewlett-Packard (HPQ). Meanwhile, coming into the index are an interesting group of Goldman Sachs (GS), Nike (NKE), and Visa (V).
This marks the first time in nearly a decade that such a three for three swap has taken place, as in 2004 AT&T, Eastman Kodak and International Paper were given the boot in favor of AIG, Pfizer, and Verizon. The change also represents the first move in about a year when Kraft—which recently spun-off a big chunk of their operations—was replaced by UnitedHealth Group (UNH).
The Changes in Focus
Investors should note that the outgoing group of AA, BAC, and HPQ, represent the smallest three companies in this price weighted index. In fact, the group combines to account for less than 2.5% of the Dow Jones Industrial Average at current levels (see all the Large Cap ETFs).
The incoming group could deserve a much bigger weight though, at least when looking at their share prices. Nike will likely be the smallest thanks to its current price around the $67/share level, while bigger allocations seem likely for GS and V, which both have share prices hovering around roughly the $170/share level.
Based on these levels, GS and V will be two of the most important components for the price-weighted index, as they will beat out Chevron ($120/share), but will likely fall just short of IBM. International Business Machines currently accounts for about 9.4% of the portfolio, so it is reasonable to assume that both Goldman and Visa will make up for significant allocations in the new version of the benchmark.
Meanwhile, consumer giant Nike will likely receive a much smaller allocation, probably somewhere around the 3.1% level. Companies that receive around that allocation right now include Disney, a firm which has a share price near $62.
Investors can easily buy up all the companies in the Dow with the SPDR Dow Jones Industrial Average ETF (DIA). This popular ETF tracks the Dow Jones Industrial Average Index, and it has over $11 billion in assets as well as daily volume of about 6.4 million shares a day (see Try Value Investing with These Large Cap ETFs).
According to the fund’s prospectus, the ETF will adjust from time to time to conform to periodic changes made by S&P to the identity of the index securities in the DJIA. The trustee of the product will generally make these adjustments within three business days—either before or after—the day on which changes are scheduled to take effect. So, in other words, look for the changes to the ETF to be pretty prompt in order to reflect the new benchmark components.
Investors should also note that the changes will have a somewhat neutral impact on the fund’s volatility, at least represented by beta. While Goldman has a beta approaching 2, both V and NKE are below .7, evening things out from this front.
From a dividend look, the changes will likely have a negative impact on DIA’s current dividend yield of 2.3%. All three of the new companies being added have a dividend below 1.75%, so we could see a decline in this ETF’s income in the months ahead (see High Dividend ETFs to Buy Even If the Fed Tapers).
Finally, in terms of sectors, there looks to be a bit of a bump up in financials, and then also into the consumer space. Financials could possibly become the top sector for both the index and DIA, depending on how you classify Visa. So, look for a bit more importance to be placed on this sector going forward in terms of DIA’s return.
The new changes could really shake up the important benchmark, taking out some of the smallest companies in the index (by weight), and replacing them with some firms that could have outsized allocations. This could shift the focus of DIA a bit, and lead to a new risk/return path for the important benchmark (also read 3 Top Ranked Financial ETFs to Buy Now).
ETF investors should note that the index changes will be reflected pretty much right away, so it is important to consider if this changes the investment case for you if you are a holder of DIA. After all, GS and V could make up pretty sizable allocations for the DJIA, so these new index picks should not be taken lightly by investors taking a closer look at this important American benchmark.
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