Last month financial newspaper Barron’s was speculating that Apple could join the elite 30 companies of The Dow Jones Industrial Average stock index within the next year. Now a report has appeared suggesting that Apple “is simply too hot for the Dow.”
“Last week it [Apple] traded in the $570 range. Because of how the Dow is calculated, Apple would dwarf the other stocks in the average and distort the Dow from its purpose – which is to reflect the broad economy, not represent the hottest stocks,” writes Christina Rexrode of The Associated Press.
If Apple was to join the Dow, it would have too much influence on the average. ConvergEx Group market strategist Nicholas Colas said: "It wouldn’t be the Dow Jones industrial average. It would be the Apple Plus Some Other Stuff Index.
The Dow is weighted so that a $1 move by any stock, moves the average the same amount. A $100 stock can move $1 much more easily than a $20 stock. So, IBM, priced around $200, and the most expensive stock on the Dow, carries nearly 12 per cent of the Dow’s weight.
“Apple would carry a quarter or more, depending on which stock it replaced,” explains the AP report.
Back in 2009 Apple was considered as a new entrant to the Dow. Had that happened, “the Dow would be thousands of points higher.”
Executive editor of Dow Jones Indexes John Prestbo told AP: "We don’t run the Dow as we would an investment portfolio.” He suggested that if Apple were included in the Dow not only would be Dow be higher, "it also wouldn’t be tracking the market."
Apple is already the biggest component of the other two major US stock indexes, according to the report. It makes up nearly 12 per cent of the Nasdaq composite and more than 4 per cent of the Standard & Poor’s 500.