Today's Dow Jones Industrial Average. (^DJI 0.58%) shuffle makes sense for the three companies on the way out. The iconic names in big banking, PCs, and steel are still relevant, but they certainly wouldn't make anyone's short list of the 30 ideal stocks in gauging the market's pulse.
Then we get to the replacements. Where's Apple (AAPL 0.12%)? Where's Google (GOOGL 10.44%)? How can the fine folks repositioning the Dow ignore the two most relevant tech names on the planet?
The index components haven't been tweaked in roughly a decade, and we have a tech name going out replaced by a pair of financial-services companies and a footwear giant? Really?
There's a pretty big reason Apple and Google didn't make the cut, and that big reason is the big stock prices. The Dow is a price-weighted index, unlike the S&P 500, which bases its daily gyrations based on market cap. That's an important distinction. Apple at $500 would have 20 times the influence of a Dow component at $25. Don't even bother working the math for Google, which kicked off the trading day at $888.
It's pretty silly, isn't it? Tech is even more relevant than it was a decade ago, yet the Dow loses a tech name and fails to add one, if not two, because of its silly and archaic measuring stick.
If you don't think that's the only thing that held Apple or Google back from the index, you're kidding yourself. Sure, two of the three stocks that were added are already trading north of $100. These three names will influence more than 10% of the index that make up the roll call of 30 names. However, it would have been far more meaningful if Apple or Google had gone in.
Add up yesterday's close of the 27 remaining names in the Dow and you're just shy of $1,800. Apple and Google combine for nearly $1,400. Strip away the three highest-priced Dow components, and the Apple and Google dynamic duo would account for more than half of Dow's movements.
In that sense, it's easy to see why the Dow passed. You don't want to see the index get too volatile, hanging on every iPhone release or Google market-share count. However, it's also proof that going with a price-weighted index doesn't make sense.
The Dow is cheating market watchers of the two tech darlings that have earned the right to be there.
