As the dust settles on Amazon’s groundbreaking inclusion in the Dow Jones Industrial Average Index, investors are left pondering – should AI powerhouse Nvidia be the next addition to this prestigious 30-stock roster? Let’s delve into this intriguing proposition.
Exploring the History of the Dow 30
Established in 1896, the Dow Jones Industrial Average Index stands as one of the oldest and most closely monitored stock market indices globally. Unlike the market cap-weighted S&P 500 Index, the Dow 30 is a price-weighted index, with constituents’ weighting based on absolute stock prices.
Interestingly, none of the original Dow members remain in the index, with the recent removal of General Electric in 2018 to make way for Walgreens Boots Alliance, later replaced by Amazon.
In 2020, the Dow underwent another reorganization, swapping Exxon Mobil, Pfizer, and Raytheon Technologies for Salesforce, Amgen, and Honeywell. Notably, this was the same year Tesla made waves with its monumental addition to the S&P 500 Index.
The Significance of Amazon’s Dow Inclusion
The decision to introduce Amazon to the Dow came following Walmart’s stock split, which impacted the index’s retail sector representation. S&P Dow Jones Indices acknowledged that this change aimed to reflect the evolving American economic landscape.
Moreover, a similar move saw Uber entering the Dow Jones Transportation Average to enhance the index’s exposure to the burgeoning ride-sharing industry, mirroring Uber’s inclusion in the S&P 500 Index in the previous year.
The Implications of Dow Inclusion
Securing a spot in premier indices like the Dow often bodes well for a stock. Inclusion signifies that passive funds and ETFs tracking the index must acquire the stock, leading to heightened demand and price support.
Tesla’s addition to the S&P 500 in 2020 exemplifies how index inclusion can validate a company’s outlook, reinforcing investor confidence. Nvidia, having emerged as a dominant force in the AI realm, could similarly benefit from a Dow listing.
Why Nvidia Deserves a Spot in the Dow
Considering the index’s evolution with time, Nvidia’s prowess in AI aligns with the shifting economic landscape. With Intel and Verizon holding minimal weights in the Dow 30, Nvidia’s entry could better reflect the current market dynamics.
However, Nvidia’s lofty share price poses a challenge, potentially granting it a disproportionately high index weight. Yet, a contemplated stock split could echo Walmart’s path, smoothing Nvidia’s route into the Dow.
Excluding Nvidia from an index seeking to capture the breadth of the market and economy risks obscuring the true narrative, given the company’s substantial impact in the AI sector.