ETFs providing exposure to the Dow Jones Industrial Average (DJIA) are gearing up for significant changes to their sector and constituent exposures later this month following the stock split of Apple, the index’s largest holding.
Apple has announced a 4-for-1 stock split that will be enacted on 24 August 2020.
Apple will enact a 4-for-1 stock split at the end of trading on 24 August, marking the fifth time the firm has carried out this type of corporate action.
Investors in Apple will effectively receive three more shares for every share that they own with the corresponding share price divide by four.
At the current share price of $450, each share in Apple is expected to be worth $112.50 following the split.
Stock splits do not fundamentally change the value of a company. That said, there is some evidence that the share price (split-adjusted) of companies that have undergone a stock split can rally directly after the action.
Analysts have attributed this to a brief surge in demand from retail investors who previously may not have been able to afford the company’s stock at the more expensive price but are now able to buy-in. The increased availability of fractional share trading at brokerages, however, is expected to diminish this effect.
While Apple’s stock split does not mean much for the company, it will impact ETFs linked to the DJIA owing to its distinctive price-weighted constituent weighting approach.
These include the US-listed $22.9bn SPDR Dow Jones Industrial Average ETF (DIA US) and the European-domiciled $440m iShares Dow Jones Industrial Average UCITS ETF (CIND LN) and $240m Lyxor Dow Jones Industrial Average UCITS ETF (DJEU LN) among others.
Price-weighted indices include constituents in proportion to their stock price per share. Stocks with higher share prices, therefore, have a greater influence on performance. These types of indices are relatively uncommon; beyond the Dow, the only other major price-weighted equity index is Japan’s Nikkei 225.
The DJIA consists of 30 of the largest stocks listed in the US. Selection is not governed by quantitative rules, rather companies are added to the index by a committee that deems incoming firms to have an excellent reputation, demonstrated sustained growth, and be of interest to a large number of investors.
Apple is currently the most expensive stock of any DJIA constituent and thus holds the largest weight in the index at 11.1%. At current prices, the stock split will see the firm’s contribution to the index reduced to less than 2.8%.
Consequently, the weight of the information technology sector – of which Apple is of course part – will reduce from 26.8% to roughly 18.5% which is broadly in line with the index’s other major sector exposures such as healthcare (currently 14.6%), consumer discretionary (14.5%), and financials (13.1%).
The evolving sector exposures would also begin to sharpen the differences between the index and the S&P 500, with the latter having a similar information technology exposure (27.5%) to the existing DJIA composition.
Looking at performance, the DJIA has lost 1.8% year-to-date while the S&P 500 is up 5.0%. If future stock market gains continue to be driven by the technology sector, the performance gap between the two indices may continue to widen.
This will of course depend on the individual performance of certain Big Tech titans. S&P 500 constituents Alphabet and Amazon, up 9.4% and 66.0% respectively year-to-date, are not included in the DJIA due to the excessive impact their high stock prices ($1,496 and $3,148 per share) would have on index performance.