With the recent addition of Amazon to the prestigious Dow Jones Industrial Average Index, replacing Walgreens Boots Alliance, the question arises – should the index’s transformation extend to welcoming AI chip giant Nvidia into its fold? Let’s delve into this intriguing inquiry.
Exploring the Dow 30
Established in 1896, the Dow Jones Industrial Average Index stands as one of the oldest and most revered global stock market benchmarks. Unlike most indices that use market cap for weighting, the Dow is a price-weighted index, determining constituent weightings based on absolute stock prices.
Notably, there are no remaining original Dow constituents in the index, a tale exemplified by the removal of General Electric in 2018 to make way for subsequent changes.
The Significance of Amazon’s Inclusion
The notable replacement of Walgreens Boots Alliance with Amazon within the Dow Jones Index was influenced by Walmart’s stock split, necessitating a recalibration to maintain the index’s retail sector exposure. This addition is a strategic move by S&P Dow Jones Indices to align the index with the evolving American economy.
Furthermore, Uber’s replacement of JetBlue Airways in the Dow Jones Transportation Average underlines the index’s adaptability in reflecting emerging industries such as ride-sharing.
The Implications of Dow Inclusion
Inclusion in benchmark indices like the Dow is invariably beneficial for stock performance. Such inclusion often acts as an endorsement of a company’s potential, leading to increased buying activity from passive funds and ETFs tracking the index.
This stamp of approval was exemplified by Tesla’s inclusion in the S&P 500 in 2020, solidifying electric car technology’s significance in the market.
Nvidia: A Candidate for Dow Inclusion
With the surge in AI relevance, Nvidia’s ascension as a $2 trillion behemoth highlights its prominence in the sector. Given the rationale for Amazon and Uber’s inclusion, Nvidia’s addition to the Dow appears justified.
Considering Intel and Verizon’s relatively low weights in the index, Nvidia’s entry could reflect the evolving American economy, mirroring the logic behind Amazon’s inclusion.
The Role of Stock Splits
Despite Nvidia’s soaring stock price presenting a hurdle for index inclusion, a potential stock split could rectify this issue. Just as Walmart’s split catalyzed Amazon’s Dow entry, Nvidia’s division may pave the way for its incorporation.
Excluding the AI powerhouse from key indices risks distorting the market’s true representation, underscoring the importance of considering Nvidia’s inclusion for a comprehensive market view.