S&P Dow Jones Indices has announced that the widely watched Dow Jones Industrial Average will undergo a reconstitution in order to moderate the sector exposure implications of Apple’s stock split.
S&P Dow Jones Indices has announced the substitution of three firms within the Dow Jones Industrial Average.
Apple split
Apple announced at the end of July that it would enact a 4-for-1 stock split on 31 August, effectively giving investors three more shares for every share that they own with the corresponding share price dividing by four.
If left unchecked, the action would result in significant portfolio exposure changes to the index and, consequently, to passive ETFs that track it.
Prominent Dow-linked ETFs include the $23.4bn SPDR Dow Jones Industrial Average ETF (DIA US) in the US and the $480m iShares Dow Jones Industrial Average UCITS ETF (CIND LN) and $200m Lyxor Dow Jones Industrial Average UCITS ETF (DJEU LN) in Europe.
The stock split has ramifications for the index due to its distinctive price-weighted construction methodology which weights the index’s 30 underlying constituents in proportion to their stock price per share. Stocks with higher share prices, therefore, have a greater influence on performance.
Apple, whose share price has soared roughly 66% year-to-date and is just north of the $500 mark, is currently the most expensive stock of any DJIA constituent. As a consequence, it commands an index weight of 12.2%.
Without any intervention from S&P DJI, the stock split would see Apple’s weight contribution reduced to approximately 3%, and the weight of the information technology sector cut from 27.6% to roughly 19% (based on current stock prices).
These changes would sharpen differences between the DJIA and the S&P 500 with the latter currently having a 28.2% exposure to the information technology sector.
DJIA reconstitution
In response to concerns and reservations expressed by investors and other market participants, S&P DJI has announced that the DJIA, which selects its constituents through a governance committee, will undergo a reconstitution that coincides with the Apple stock split.
On 31 August, three firms – Exxon Mobil (energy), Pfizer (health care), and Raytheon Technologies (industrials) – will be removed from the DJIA and replaced with Salesforce.com (information technology), Amgen (health care), and Honeywell International (industrials).
According to S&P DJI, the changes help the DJIA to maintain a true reflection of the American economy while also promoting diversification and removing overlap between companies of similar scope.
The inclusion of Salesforce.com, the San Francisco-headquartered developer of enterprise cloud software solutions, will help to offset the reduction in exposure to the information technology sector caused by Apple’s stock split. At Salesforce.com’s current stock price of $216, excluding the effect of the other substitutions, the weight of the information technology sector in the DJIA is expected to reduce from 27.6% to roughly 23.7%.
The departure of Exxon, which has a DJIA tenure dating back to 1928, highlights the troubles plaguing the energy sector including talk of peak oil demand, growing calls for environmentally friendly energy solutions, and the present oil price woes caused by the Covid-19 pandemic. Chevron will become the sole DJIA constituent from the energy sector – the firm has a current weight of just 2.1%.
The other substitutions will result in the same number of constituents from the health care and industrials sectors; however, both sectors are also expected to increase in weight – Pfizer (current index weight of 0.9%) has a share price of $38 compared to $248 for Amgen, while Raytheon Technologies (current index weight of 1.5%) has a share price of $61 versus $164 for Honeywell International.