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Howard Silverblatt on the significance of the Dow shake-up and what it means for investors

The Dow Jones Industrial Average is kicking out players: Exxon Mobil, Raytheon, and Pfizer, replacing them with Salesforce, Amgen, and Honeywell on August 31. Howard Silverblatt, Senior Industry Analyst for S&P Dow Jones Indices, joined The Final Round to discuss the significance of this move and what it means for investors.

Video Transcript

MYLES UDLAND: [INAUDIBLE], Amgen, and Honeywell entering the Dow, replacing Exxon, Pfizer, and Raytheon respectively. And for more on this, we are joined by Howard Silverblatt. He's a senior industry analyst, index investment strategy, for S&P Dow Jones Indices. Howard, great to have you on the program.

So let's just get to-- I think the name that stuck out to me, and I think many others, last night-- Salesforce replacing Exxon. Just kind of talk us through the thinking of the committee in making that change to the Dow.

HOWARD SILVERBLATT: Maybe before I get into that you need to [INAUDIBLE] Apple, because Apple has a four-for-one stock split. But in and of itself, Apple went from 12% of the Dow down to 3% of the Dow. And it takes technology within the Dow-- and technology is hot, obviously, no matter how you measure it, from 27% down to 20%.

So the fact that Apple was splitting four for one and we had other changes that we wished to do all came together, OK? I'm not saying that-- without Apple's adjustment that these would not have been changed, but it made it come together. To get into the Exxon situation and the Salesforce-- one of the items we wished to do was to maintain a higher presence in technology. Because of that Apple split, it went from 27 in tech down to 20.

Putting in Salesforce is another way to boost it. It does go back up to 23, less than the 27 but more than the 20. That puts it in there on the [INAUDIBLE]-- other side, Exxon, which has been in the Dow since 1928 when it became the Dow 30-- different name at that point, Standard Oil of New Jersey, is more of the fossil fuel. And that seems to be having much of a smaller footprint, if I can use that terminology online. And we still have Chevron, which is twice the weight because of the pricing mechanism.

So instead of having 3% in energy in the Dow, you're gonna have 2%. Again, so it was a matter of realigning to some degree. There were other factors-- the indice-- to make it more compatible with what the general market is.

Again, we're not looking to forecast the market. We're not looking to beat the market. We're looking to emulate. it.

So that was an important item, the Salesforce in there. The other two-- I think you mentioned about Pfizer is going out and Amgen coming in. Pfizer's one of the lowest-- is the lowest priced in the index. They are also doing a spinoff on their generic drugs. So the price is going down more-- Amgen, big biopharmaceutical, and that was in there.

And so far as the Honeywell goes, the old Raytheon, which is Raytheon and United Technologies together, had spun off Otis Elevator and Carrier, the air conditioning. So they really had a much smaller niche in there. And looking at the aerospace and defense, Honeywell better-- along with the existing Boeing that's in there-- better represented that situation.

DAN ROBERTS: Howard, Dan Roberts here.


DAN ROBERTS: We had a colleague of ours today write a little bit of an explainer on just who decides which stocks get booted from the Dow and that it's a little bit arbitrary-- it's just a committee of five individuals. And, especially at this time when tech stocks are really all the excitement-- I mean, every day we're here talking about the [? same ?] [? names, ?] especially Apple and Tesla. And when the NASDAQ has had the gains it has had and when the Dow is the only of the major indices that I believe is still negative for the year, do you think that the Dow 30 as an important indicator is falling out of favor a little bit?

HOWARD SILVERBLATT: No. Two different indices with two different purposes on them-- the S&P-- as an example-- 500, in a sidebar to that, the top five companies in the S&P 500, which are now more top-heavy than they've been since at least the '60s and cap about 23% of the indice. That is also a concern within the S&P 500, because it's market-weighted, OK. But the S&P 500 represents broad market. You go down to sectors and do other items and, again, market-weighted.

The Dow is a different item-- started in 1896 as the Dow itself, OK. You add them up, you divide-- it's an average. It's not the complicated resource. You couldn't have done the weighting system back in 1896. The bottom line is that most money managers are using the S&P 500, 'cause it's broader and they can slice [INAUDIBLE] in different ways, taking sectors, subgroups, selling within, without, options, whatever they want. So a lot less index against the Dow.

However, the Dow has recognition, the biggest recognition of any indice, forgetting the size, OK. They don't have as much [AUDIO OUT] as far as an index, so the trading won't be as much as [INAUDIBLE] made these kind of changes in the 500. But it's definitely outdated. It's a good benchmark it's using.

If you're with the S&P and the 500, over time, they call it very well-- short term, not at all, and we are in a short-term period. One of the reasons is technology on there, but it's, again, two different indices that [INAUDIBLE] in different ways.

- Hey, Howard. What's the impact of this? Because not a lot of money is indexed the Dow, but, I mean, it is significant to be included in the Dow Jones Industrial Average. They're just-- oh, how significant, I guess, is this for investors at this point to see some of these stocks now included in the Dow?

HOWARD SILVERBLATT: It is a very big social item. It is something that each one of these companies that are being added will put in their reports, quarterly, annuals, and their CEOs and see if [INAUDIBLE] will discuss and brag about it, as the other ones will explain why they were taken out on there. So it is a major item to include it.

But you're correct. It's only about $31 billion [INAUDIBLE] against it compared to the trillions of dollars on the S&P 500. So the actual trading for money managers is not as much with the Dow. It's used as a benchmark for a lot of things, and inclusion is important on there. So it will be a much bigger item socially than actually when it comes down to the trading floor.

MYLES UDLAND: And then, Howard, just quickly before we let you go, I'm just curious if you guys had had any sense of-- that Apple was thinking about splitting their stock, or if they made their decision and then you kind of met and the committee thought, well, maybe now, as you mentioned, we're gonna have to change some things. I mean, did it seem like there needed to be a change, I guess, at the Dow, just kind of looking at the composition of the group, you know, a month ago before Apple had announced their news?

HOWARD SILVERBLATT: Too far to the [INAUDIBLE]. One, we had no knowledge of Apple prior, nor should we have. We have no contact with companies that are going in or out. And these companies knew that they were being taken in or out. That goes for all our indices. The-- Apple gave an opportunity since the reshuffling to do things that we were looking to do and considering doing. If-- each one of these changes had to be viable and justifiable independent of Apple or the others, OK. So Apple just helped it come together where all three could be done in one quick swoop with the re-allocations.

MYLES UDLAND: All right. Howard Silverblatt with S&P Dow Jones Indices. Howard, always great to get your thoughts. Thanks so much for calling in today.