Under-representation in technology has penalized the Dow in 2020, when it has frequently trailed the market-cap weighted S&P 500, whose concentration on megacap companies like Amazon.com and Alphabet has juiced its returns. Neither of those companies are effectively eligible for the Dow given their $1,000-plus share prices.
The blue-chip index weights its constituents by price rather than market value, making it different from the broader S&P 500. A committee chooses members in an effort to maintain “adequate” sector representation and favors a company that “has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors,” according to its website. Other major indexes add and subtract members on a rules-based process.
Honeywell, meanwhile, is returning to the average after being kicked out 12 years ago to make way for a financial services company, Bank of America, and an energy producer, Chevron. Its shares are down about 9% in 2020 but before that had risen in 10 of 11 years, pushing its market value above $100 billion.
While the Dow’s influence has faded over the years as passive managers linked to benchmarks based on market value, the index remains an exclusive club and still serves as one of the highest profile showcase of American industrial heft. Roughly $31.5 billion of assets are benchmarked to the Dow, with $28.2 billion of passively managed funds linked. (The figures are $11.2 trillion and $4.6 trillion for the S&P 500.)
The last time three companies were added to the Dow was seven years ago, when Visa Inc., Goldman Sachs Group Inc. and Nike Inc. displaced Bank of America Corp., Hewlett-Packard Co. and Alcoa Inc.
This story was provided by Bloomberg News.