Why the Dow Needs Apple and Google

The Dow Jones Industrial Average is at risk of falling behind as tech giants like Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOG) continue to flourish.

It’s time for the Dow to adjust to these market changes, says Barrons.

The Dow contains 30 major companies, but it was last adjusted way back in 2009. Three years may not seem like a long time, but in a fast-changing market, it’s too long.

Current Dow component companies like Alcoa (NYSE: AA), Bank of America (NYSE: BAC), and Hewlett-Packard (NYSE: HPQ) are not the hits they used to be. Apple and Google, meanwhile, are huge representations of the current market.

The problem with adding these companies to the Dow is that they’re priced so high. And whereas in the past splitting shares was fairly common, nowadays companies like keeping their prices high, and investors don’t mind it either.

Apple, for example, is priced near $605, which would give it a 26% weighting on the Dow according to how it calculates company weightings. Google is lower after its stock split, at roughly $300, but it would still have a 15% weighting, which is more than desired.

It has been suggested that the Dow Jones changes how it weights its companies in order to stay relevant in the market. Howard Silverblatt, an analyst for the S&P, thinks it’s about time:

“A system that worked for over a century may need to be adapted to include higher-priced stocks.”

But Dow Jones executive director John Prestbo disagrees. He does not think the system, which is unique from other indexes in the way that it has been running since 1896, should have to adjust for companies that don’t qualify:

“My job and that of the index committee is to administer the Dow so that it does its job of reflecting the stock market, not to get companies into the Dow that people want.”

If Apple were included, adjustments like capping weighting would have to be made. And if this were done to Apple, the Dow would only marginally reflect its changes. If there were no capping system, Apple would have too much pull in changes in the Dow, possibly moving it 100 points daily. 

But the fact remains that the industry is changing. And these emerging tech giants are becoming a big and important part of the market makeup. They are simply too big to ignore if the Dow wants to stay relevant...