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 That may not be a problem for the company behind the iPhone and the
iPad, after all Apple shares recently hit record highs. It is,
though, hurting those who tie their investments to the performance
of the venerable Dow, which was first calculated in 1896 and is
still probably the best-known stock index in the world.
Since Apple split its shares seven-for-one last June 6, it’s
delivered investors a gain of more than 43 percent including
dividend payments, and that has contributed almost one third of the
Nasdaq 100’s return of 18.6 percent, according to ETF.com. By
comparison, the Dow’s total return has been only 8.97 percent over
that period, and it has also underperformed the S&P500 – which does
include Apple – and has a 9.56 percent return.
Had Apple been substituted for 29 of the 30 Dow components last
June, the index would have been higher. The only Dow member that
would have had more of a positive influence on the index than Apple
is Visa. If Apple had replaced a badly lagging stock such as IBM,
which has dropped more than 13 percent since Apple’s split, the Dow
would now be about 450 points higher than its Friday close at
18132.70 (and have gained 9.8 percent rather than the 7.1 percent
increase it has recorded, without dividends).
(For an interactive graphic on how if Apple had been substituted for
almost all of the Dow's 30 components, the index would be higher,
click here: http://reut.rs/1DK9ra0)
INDEX CHANGES RARE
So why can’t a company that so dominates the consumer and technology
worlds, and whose share price has climbed an astounding
split-adjusted 3,500 percent since January 2000, get into an index
that has gained just 55 percent in that period.
S&P Dow Jones Indices, a unit of McGraw Hill Financial Inc, rarely
makes changes to the index it owns, and often only when forced to by
a major corporate event, such as an acquisition of a component.
The last change was in September 2013, when Alcoa, Hewlett-Packard
and Bank of America were replaced by Visa, Nike and Goldman Sachs in
one of the biggest shake-ups in the index for some years. That
decision was triggered by the low stock prices of the three
companies that were removed and by a desire to diversify the
industry groups in the index, according to a statement from S&P Dow
Jones Indices at the time.
“S&P doesn't comment on any pending index changes with respect to
any specific companies," said David Blitzer, managing director and
chairman of the index committee at S&P Indices in New York.
SUSTAINED GROWTH
According to S&P Dow Jones Indices' guidelines on its website, a
stock "typically is added to the index only if the company has an
excellent reputation, demonstrates sustained growth and is of
interest to a large number of investors." Apple would certainly
qualify on those criteria.
In addition, S&P Dow Indices says that "adequate sector
representation within the indices is also a consideration in the
selection process."
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As of the end of January, 9.47 percent of the Dow was allocated to
the technology sector, placing it fifth among the nine sectors that
comprise the index. Given that technology makes up 19.9 percent of
the broader S&P 500, that should also help Apple’s case. And given
Apple has also more than earned its stripes as a consumer and media
company it clearly has other claims on membership.
Before June last year, it would have been much more difficult to add
Apple because pre-split, the stock was trading at such a high price
– it reached $705 back in 2012. The Dow is a price weighted index,
which means a stock with a higher price has a greater influence on
the index. By contrast, the S&P and Nasdaq indexes are weighted by
market capitalization.
Many investors who tie their investments to a broad index will use
the S&P 500 ($1.9 trillion of index funds) or the Nasdaq 100. But
some do buy the Dow through vehicles such as the SPDR Dow Jones
Industrial Average ETF, which has a market value of about $12.32
billion and is known as the Dow Diamonds. There are also leveraged
funds that seek to double or even triple its gains, such as the
ProShares UltraPro Dow30.
Followers of the Dow have to get used to some odd influences because
of its structure. For example, a 1 percent move in an index member
like Visa with a share price of $271.30 has more than 10 times the
impact of a similar change in a fellow Dow member such as General
Electric Co, with a stock price at $25.99.
Visa has risen 28 percent since the June split, lagging Apple, and
has less than a quarter of Apple’s market value. However, it still
contributed more to the index gains than Apple would have in its
place because Visa’s shares are priced so high. That will change on
March 18 when Visa itself does a four-for-one stock split.
And the shares of two Dow components have just about matched Apple’s
performance since last June with gains of about 42 percent each
before dividends. But the impact of the two, Home Depot and
UnitedHealth Group Inc, on the index is less than if they were
replaced with Apple, this time because Apple’s $128.46 closing share
price on Friday is a bit higher than theirs.
(Reporting by Rodrigo Campos, Chuck Mikolajczak; With additional
reporting by Caroline Valetkevitch and Ashley Lau; Editing by Linda
Stern and Martin Howell)
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