By Michael Wursthorn
Even before Apple Inc. unveiled plans for a stock split, the Dow
Jones Industrial Average struggled this year to keep up with its
broader counterpart, the S&P 500 index.
The addition of three new components on Monday -- when Apple
starts trading on a split-adjusted basis -- likely won't help
matters.
That is because the revamped Dow industrials put less emphasis
on technology stocks, the engine behind the stock market's rebound
from the lows of March. Starting Monday, tech will constitute less
than a quarter of the Dow's weight versus nearly 28% for the
S&P 500. The broader index includes Amazon.com Inc., Facebook
Inc. and Google parent Alphabet Inc. -- none of which are in the
Dow.
With millions of people still homebound, technology stocks have
been clear winners during the coronavirus crisis. People are
working from home, streaming movies and using social media to
connect with friends and family, hastening the adoption of tech in
their everyday lives. Those changes in behavior have made big tech
stocks among the few reliable bets during a crisis that has upended
most other businesses.
"With the economy we have now because of Covid-19 and the
difference between whether companies are open or not, over the
short term we could see a significant variance continuing," said
Howard Silverblatt, a senior index analyst at S&P Dow Jones
Indices.
The S&P 500 is outperforming the Dow industrials by roughly
8 percentage points in 2020 -- the widest gap since 1932, according
to Dow Jones Market Data. Short-term rifts between the two
benchmarks aren't uncommon, said Mr. Silverblatt, and the Dow and
the S&P 500 tend to track each other more closely over longer
periods. But this year has been markedly different due to how the
pandemic has deepened a split within the market along familiar
lines: growth versus value.
Many tech and communications companies in the S&P 500 are
growth stocks, or those that promise to deliver faster-than-average
profit growth in the future. More staid businesses, such as
industrial and financial companies, are often in the value bucket
and typically trade at low valuation multiples.
Growth stocks in the S&P 500 have soared 25% this year
versus an 11% decline for value shares. The outperformance of
growth stocks has driven the market-cap-weighted S&P 500 up 57%
from its March 23 trough and 8.6% for the year.
The Dow tilts more toward value by having a bigger
representation of industrial, financial and health-care stocks
relative to the S&P 500. Its price-weighted structure doesn't
usually help matters, since stocks with the highest share price
have the most influence.
The run-up in Apple's share price this year has benefited both
indexes and kept the gap from widening even further. Shares of
Apple have traded higher than the 29 other Dow stocks for much of
the year, contributing more than 1,400 points to the index. And
Apple's 70% gain since the end of December has pushed its market
cap above a record $2 trillion.
Before Apple's 4-for-1 stock split, tech stocks represented 28%
of the Dow, on par with the S&P 500. But some of its other most
powerful constituents based on share price -- Goldman Sachs Group
Inc., Boeing Co. and Caterpillar Inc. -- are down in 2020. And the
Dow's most influential stock following the Apple split,
UnitedHealth Group Inc., is up just 6.9% this year.
Apple's split would have put a serious dent in the tech sector's
influence in the Dow. The committee that manages the Dow, which
includes editors of The Wall Street Journal, which is published by
Dow Jones & Co., a part of News Corp, sought to rectify the
imbalance by replacing Exxon Mobil Corp. with Salesforce.com Inc.,
along with two other component swaps. But those changes nudged
tech's weighting up only to 24%.
"I don't think it means as much as it did in the 1930s," said
Nate Fischer, chief investment strategist at Strategic Wealth
Partners.
The disconnect, for however long it might last, isn't a major
concern, said Mr. Silverblatt of S&P Dow Jones Indices. After
all, the Dow isn't meant to imitate the S&P 500 or any other
index. Instead, the Dow's construction is intended to emulate the
top of the U.S. stock market, he said.
Take the inclusion of Salesforce. Its addition not only nudged
tech's weighting in the Dow higher, but it also diversified the
sector's representation by adding a pure-play cloud company. When
it came time to decide what Salesforce would replace, an energy
stock was the obvious choice, Mr. Silverblatt said.
Similar thinking likely played out with the Dow's other changes.
Pfizer Inc. has the lowest share price of the 30 stocks in the
index, diminishing the health-care sector's influence. Its
replacement, Amgen Inc., boosts the sector's heft. Meanwhile,
Raytheon Technologies Corp.'s business following the merger with
UnitedTechnologies Corp. overlapped with aerospace and defense
giant Boeing Co. The substitution of Honeywell International Inc.
diversifies the Dow's industrial stocks.
There are limitations to the Dow. Investors have long questioned
why Amazon and Alphabet aren't included when they represent the
21st century economy. Their hefty share prices would wreak havoc on
the index by drastically boosting the weightings of their
corresponding sectors. That underscores why $31.5 billion in assets
are linked to the Dow through index funds versus more than $11
trillion for the S&P 500.
That hasn't fazed some investors who have hitched their
portfolios to the Dow. Tim Courtney, chief investment officer of
Exencial Wealth Advisors, said several clients have sought to
follow the Dow by buying shares of a $23 billion exchange-traded
fund that tracks the index, the SPDR Dow Jones Industrial Average
ETF Trust.
"Some investors think they're getting better exposure to the
broader economy, and you might want to do that if you feel like
market weightings in the other two indexes have gone too far," said
Mr. Courtney. "They're more concerned about valuations so they go
to an area not so focused on growth."
Write to Michael Wursthorn at Michael.Wursthorn@wsj.com
(END) Dow Jones Newswires
August 30, 2020 07:14 ET (11:14 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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