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Major changes are coming to the Dow Jones Industrial Average.
The S&P Dow Jones Indices announced Monday that three new companies will join the benchmark of 30 stocks. Salesforce.com will replace Exxon Mobil, Amgen will replace Pfizer, and Honeywell International will replace Raytheon Technologies.
The changes will take effect before the market opens on Monday August 31.
The upheaval was prompted by Apple’s decision to proceed with a 4-to-1 stock split, which would significantly reduce the benchmark’s exposure to the tech sector.
“Basically, Apple – on its own – took the technology [weighting] within the Dow Jones fell from 27.6% to 20.3%. That’s a significant drop, “Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, told CNBC.” By adding Salesforce, you can get the Dow back to 23.1% in technology.
Due to Apple’s 4-to-1 stock split, its ranking is expected to drop from the most weighted component to 16th. The 124-year-old blue chip average is price-weighted, which means stocks with higher stock prices are given more weight in the gauge.
Apple has climbed more than 70% this year to become the first U.S. company to achieve a market cap of $ 2 trillion. The tech name has contributed over 1,400 points to the Dow so far this year, by far the biggest influencer. Without Apple’s hard work, many on Wall Street believe the Dow might have a harder time catching up with the S&P 500 and Nasdaq Composite, which have already recovered their respective records.
Silverblatt added that the 3 stock reshuffle is “extremely unusual”. “It’s a huge amount, especially when you add Apple, which revalues it significantly. So we expect to see a lot of action, a lot of buying and selling.”
Equity swaps also sum up the changing picture of the market.
These measures “help diversify the index by removing the overlap between companies of the same size and adding new types of companies that better reflect the US economy,” the S&P Dow Jones Indices said in a statement.
Exxon has been a component of Dow for almost 100 years. It was first added as Standard Oil of New Jersey in 1928 when the benchmark increased from 12 stocks to 30. Pfizer was added at the end of 2004.
For Honeywell, it is a return to the Dow Jones after its removal in February 2008.
“I’m surprised by this news because energy still powers the world, but we know how out of favor it is,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “I’m not sure there’s much of a difference between PFE and Amgen or Honeywell and Raytheon.”
The Dow Jones is up about 55% from its March 23 low, falling 4% below its all-time high of 29,568.57 since February 12.
Shares of Salesforce and Amgen jumped 4% in extended trading Monday after the news broke, while Honeywell was up 3%. Exxon, Pfizer and Raytheon were all down about 2% after-hours trading.
– CNBC’s Yun Li, Fred Imbert and Kevin Stankiewicz contributed reporting.
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