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Amazon joins 29 other ‘blue chip’ companies in Dow Jones Industrial Average

AP – Amazon.com Inc is joining the ranks of one of Wall Street’s oldest and most exclusive stock indexes: The Dow Jones Industrial Average.

The e-commerce pioneer officially took its position among the 30-company Dow before the open of trading yesterday, replacing drugstore operator Walgreens Boots Alliance.

S&P Dow Jones Indices opened the door to Amazon’s inclusion in the Dow and Walgreens’ exit to rebalance the index in light of a three-for-one stock split by another Dow company, Walmart.

Seattle-based Amazon will share membership in the Dow with the likes of Apple, Boeing, JPMorgan Chase and Coca-Cola.

WHAT IS THE DOW?

It’s a measure of 30 stocks of established, well-known companies. These stocks are sometimes known as “blue chips”, which are supposed to be on the steadier and safer side of Wall Street.

Traders work on the floor of the New York Stock Exchange in New York City, United States. PHOTO: AFP

WHAT’S IN THE DOW?

Not just industrial companies like Caterpillar and Honeywell, despite the name.

The roster has changed many times since the Dow began in May 1896 as the United States economy has transformed. Out, for example, was Standard Rope & Twine, and in recently have been big technology companies.

Apple, Intel and Microsoft are some of the newer-economy names currently in the Dow. Before Amazon, the most recent additions to the Dow were Salesforce.com, Amgen and Honeywell International in August 2020.

They replaced Exxon Mobil, Pfizer and Raytheon Technologies, now known as RTX. The financial industry also has a healthy representation with American Express, Goldman Sachs, JPMorgan Chase and Travelers. So does health care with Amgen, Johnson & Johnson, Merck and UnitedHealth Group.

WHY IS AMAZON IN AND WALGREENS OUT?

The shift is a reaction to a planned three-for-one stock split by another Dow company, Walmart.

A stock split reduces the retailer’s stock price. Because the Dow is a price-weighted index, which means stocks that fetch higher prices are given more weight, Walmart’s stock split will reduce the weighting of the stock in the index.

To account for this, S&P Dow Jones Indices is rebalancing the index by dropping Walgreens, which currently has the lowest stock price of all the companies in the Dow, and adding Amazon.

S&P Dow Jones Indices is also adding Amazon in a bid to increase the Dow’s consumer retail exposure to reflect the “evolving nature of the American economy”.

Amazon’s entry into the Dow, Walgreens’ exit and Walmart’s stock split will cause a ripple effect on the weighting of the Dow stocks.

Once the shift is completed, Amazon’s weight in the Dow will rank 17th out of the 30 stocks in the index. Walmart’s weighting will drop to 26 from 17. UnitedHealth Group will remain the most heavily weighted stock in the index.

IS THE DOW THE MAIN MEASURE OF WALL STREET?

No. At 30 companies, the Dow represents a narrow slice of the economy. Professional investors tend to look at broader measures of the market, such as the S&P 500 index, which has nearly 17 times the number of companies within it.

More than USD11.2 trillion in investments were benchmarked to the S&P 500 at the end of 2019, according to estimates from S&P Dow Jones Indices. That’s 350 times more than the USD32 billion benchmarked to the Dow Jones Industrial Average.

HOW DIFFERENT ARE THE DOW AND THE S&P 500?

Their performances have historically tracked relatively closely with each other, but they have diverged significantly the last couple of years.

In 2023, the Dow gained 13.7 per cent, while the S&P 500 gained 24.2 per cent. In 2022, a down year for stocks, the Dow lost 8.8 per cent, while the S&P 500 slumped 19.4 per cent.

So far this year, the S&P 500 is up about 6.7 per cent, while the Dow is up 3.8 per cent.

A big part of the performance gap between the indexes is that the S&P 500 has more of an emphasis on Big Tech stocks, which have been among the market’s biggest winners. Hopes that the Federal Reserve is done raising interest rates and may soon start cutting them and a frenzy around artificial-intelligence technology have pushed seven stocks in particular to dizzying heights.

Alphabet, Amazon, Apple, Microsoft, Meta Platforms, Nvidia and Tesla alone have accounted for much of the S&P 500’s gains in recent years, and only two of them are in the Dow: Apple and Microsoft.

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