The Dow Jones Industrial Average (DJI^) just got less antiquated.
On Tuesday S&P Dow Jones Indices announced Amazon (AMZN) will replace Walgreens Boost Alliance (WBA) in the benchmark index. The change is set to go into effect before the market opens on Monday, Feb. 26.
"The index needs to stay relevant and reflect the higher end of US markets, and Amazon was a natural selection," Howard Silverblatt, S&P Dow Jones Indices senior index analyst, told Yahoo Finance Live.
He added, "For the average investor it will mean that the index is more reflective of consumer selections at this point in time."
The swap of tech giant Amazon for Walgreens adds exposure to a variety of areas for the index. Amazon's wide range of industries including cloud computing, artificial intelligence, healthcare, and e-commerce far exceeds the reach of the traditional pharmacy brand in Walgreens. This, Silverblatt said, was crucial in influencing the switch.
"[Amazon is] developing and giving you exposure to a few other fields," Silverblatt said. "But mostly you’re dealing with the consumer, the retail sector, where the bulk of [Amazon] is right now. And that’s a positive because the consumer is the biggest part of the economy."
Silverblatt highlighted that unlike the S&P 500, which rebalances every quarter, the Dow Jones doesn't reshuffle the 30 companies within its index frequently. In the 120-year history of the Dow, there have only been 60 changes, per Silverblatt.
One reason a company can be swapped out of the index is if its share price deteriorates and becomes less relevant to the overall index. Walgreens has seen that recently with shares down nearly 70% over the last five years, while Amazon is up more than 100% in that same time frame.
Walgreen shares have notably slumped as more shoppers move to online options like Amazon. The struggles of pharmacies were most recently highlighted by Rite Aid's bankruptcy filing in October.
"We don’t like to change the members in there because of consistency, but at times it has to be done because as the economy changes, the index has to change," Silverblatt said.
The shift was a welcome sign from Wall Street, which now sees the index ending the year at 42,000, up from 41,000 prior the announcement, according to Silverblatt.
Part of this call likely stems from the increased exposure Amazon's addition provides to the stocks that have been driving the S&P 500 higher over the past year.
Amazon is now the third of the "Magnificent Seven" tech stocks to be added to the Dow, joining the likes of Apple (AAPL) and Microsoft (MSFT). Those seven stocks, which also include Alphabet (GOOGL, GOOG), Meta (META), Tesla (TSLA), and Nvidia (NVDA), have helped propel the S&P 500 to a 24% gain in the past year. Meanwhile the Dow Jones has risen 16% in the same time frame.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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