---
title: "Why Does the Dow Change the Stocks it Tracks?"
description: "Why did the Dow Jones Industrial Average swap GE for WBA? Why drop AT&T for Apple? What does this mean about the economy?"
canonical_url: https://trendshare.org/how-to-invest/why-does-the-dow-change-the-stocks-it-tracks
markdown_url: https://trendshare.org/ai/why-does-the-dow-change-the-stocks-it-tracks.md
published: 2013-09-16
last_updated: 2018-07-02
content_license: https://trendshare.org/about/disclaimer
---
# Why Does the Dow Change the Stocks it Tracks?

Source: https://trendshare.org/how-to-invest/why-does-the-dow-change-the-stocks-it-tracks
Updated: 2018-07-02
On June 19, 2018, the Dow Jones Industrial Average changed for the 55th
time in 133 years. The DJIA (or Dow) is one of the most popular measurements of
stock market and economic activity, even though it's changed more often than
you might think.

The companies in the Dow are 30 enormous American corporations. Its value is
the weighted average of the stocks in the Dow. A weighted average is this: for
every $1 change in price of any stock in the Dow index, [the Dow itself changes by 6.42 points](https://en.wikipedia.org/wiki/DJIA#Calculation).)

When the Dow changes the companies it tracks—as it does every few
years—it does so in an attempt to reflect the behavior of the American
economy and the stock market more effectively. What's the true state of
American business? Which industries are growing? Which are shrinking? Which
companies are truly the core of American corporate business? When the Dow
member companies change, pay attention.

## Why did the Dow Drop GE in 2018?

[GE](/stocks/GE/view) was on the Dow for 110 years and was the
last DJIA stock from 1986. As of June 20, 2018, it's no longer included in the
index.

While this business is a venerable part of the American economy—it was
founded by Thomas Edison—it's floundered in recent years. From 2001 to
2017, its performance fell under CEO Jeff Immelt. In that time between Immelt's
replacement and the removal from the Dow, GE shares fell over 50%.

Performance of the stock isn't the only reason or the most important reason
to replace GE. Industrial businesses like GE aren't as big a component of the
American economy as other businesses.

With that said, GE was the worst-performing stock in the Dow, while
manufacturing company [Boeing](/stocks/BA/view) was the highest
performing stock.

(Because the DJIA is a price-weighted index, "performance" in this case
means "share price" alone. GE's $13/share was a lot lower than BA's $340/share.
That leaves the question of GE's replacement, which was around $68/share when
the change was made.)

## Why did the Dow Add Walgreens Boots Alliance WBA in 2018?

As of June 20, 2018 [WBA](/stocks/WBA/view) is a part of the Dow
Jones Industrial Average.

WBA owns the Walgreen's pharmacy chain. Adding this business to the DJIA
reflects the fact that the American economy is shifting to businesses such as
healthcare, tech, and consumer goods.

Replacing the lowest share price on the DJIA with one five times greater
does good things for the performance of the index as well.

Remember, though, that share price doesn't necessarily reflect performance.
Some investors are predicting that [GE is ripe for a turnaround](https://www.marketwatch.com/story/why-ge-stock-may-be-a-buy-after-getting-dumped-from-the-dow-2018-06-20). Similarly, the push for companies such as Amazon
to move consumer pharmaceutical sales to ecommerce represents a threat to the
Walgreens business, which has invested heavily in physical retail space.

The Dow's move makes sense in the context of reflecting the shifts in the
American economy, regardless of the success or failure of any individual
company.

## Why Did the Dow Add Apple in 2015?

[Apple](/stocks/AAPL/view) is one of the great technological
turnaround stories of the 21st century. When its cofounder Steve Jobs returned,
he oversaw the company's transformation into a niche computer manufacturer to a
consumer electronics and media powerhouse. With the iPod, iTunes, iPhone, and
iPad (as well as the continued success of its Mac lines), Apple became one of
the richest companies in the world. Sometimes it's the largest company in the
world in terms of [market capitalization](https://trendshare.org/how-to-invest/what-is-market-capitalization).

As the largest company in the world, Apple is a great fit for the Dow.
Though the DJIA is well established (and seen as stodgy in some circles),
keeping up with the times—reflecting how important consumer mobile
devices are to the modern world—represents how the index attempts to
reinvigorate itself.

It doesn't hurt that Apple had a stock split not long before the addition;
that kept is stock price of over $700 from dominating the rest of the
index.

## Why Did the Dow Drop AT&T in 2015?

[AT&T](/stocks/T/view) was one of the lowest-priced stocks in
the index. It was also seen as redundant in the telecommunications sector.  The
Dow's inclusion of [Verizon](/stocks/VZ/view) already gave enough
weight to that sector.

At least, that's the line of reasoning that anyone willing to go on record
gave. In likelihood, the combination of Apple's stock split, the doldrums of
AT&T's stock price, and the relative cachet of the two companies made the
decision easy.

## Why Did the Dow Drop Hewlett-Packard in 2015?

[Hewlett-Packard](/stocks/HPQ/view) was one of the original
Silicon Valley success stories. Its founders built a high technology equipment
company from humble roots in a garage into a globe-spanning company in diverse
technology areas.

HP has struggled in the 2000s. A fissure in its board of directors has
culminated in a steady stream of troubled CEOs. The company isn't sure where
it's going or what it's doing, and its stock price has reflected that. The Dow
replaced HP with [Visa](/stocks/V/view).

## Why Did the Dow Drop Alcoa in 2015?

Unless you follow the aluminum market, you may have never have heard of [Alcoa](/stocks/AA/view). When manufacturing and heavy industry
dominated the American market, the raw materials sector (things like steel and,
in Alcoa's case, aluminum) was a powerhouse. Alcoa's stock rode high, soaring
to huge valuations.

That hasn't been the case for a long time, and Alcoa's valuation was tiny
(between $8 and $9 billion dollars) compared to other stocks. As of December
2014, Alcoa rose to healthy $18-20 billion valuation, but that was long after
its replacement by [Nike](/stocks/NKE/view). At that point, Nike had
a valuation of almost $60 billion—seven or eight times larger.

## Why Did the Dow Drop Bank of America?

Dropping [Bank of America](/stocks/BAC/view) in favor of [Goldman Sachs](/stocks/GS/view) doesn't make much sense, when you
compare market capitalization. Bank of America had twice the capitalization of
Goldman Sachs—over $150 billion compared to about $75 billion.

Keep in mind that the Dow tracks the absolute dollar values of *stock
prices alone*, without weighting the size of the company (market
capitalization), earnings, or anything else. In that sense, it wants companies
with higher stock prices even though they're not necessarily better. Bank of
America's stock price of $15 in late 2013 looked worse than Goldman Sachs with
a stock price of $160 per share.

## Why Did the Dow Add Nike?

Nike's huge and growing. Alcoa isn't. The aluminum industry has been on the
decline as a share of American business for a long time. It's surprising Alcoa
has been in the Dow as long as it has.

## Why Did the Dow Add Visa?

The Dow classifies Visa as an information technology company, just like HP.
(Seriously, [the Dow Jones reorganization press release says so](http://www.prnewswire.com/news-releases/goldman-sachs-visa--nike-set-to-join-the-dow-jones-industrial-average-223120141.html)). Swapping one industry
leader for another makes a lot of sense, especially when one appears to be
ascending and the other declining.

More than that, HP's being penalized for its lost decade and a half. The
company hasn't gone anywhere since the disastrous days of [Carly Fiorina](https://carlyfiorina.com/meet-carly) (think of all of
the acquisitions that haven't turned out at all well), and there's little hope
for a dramatic turnaround. Visa, on the other hand, is like many other
companies in the financial services industry: making lots and lots of
money.

## Why Did the Dow Add Goldman Sachs?

No one can explain this. Goldman Sachs specializes in investment
banking—high end services. Bank of America has a much broader focus that
includes consumer banking. This swap may be solely based on share price, which
is a silly measurement anyhow. (See [The Dow Jones Industrial Average is Ridiculous](https://www.washingtonpost.com/blogs/wonkblog/wp/2013/09/10/the-dow-jones-industrial-average-is-ridiculous/) for more details.)

## Should Investors Care About Changes to the Stocks in the DJIA?

The Dow Jones Industrial Average is just a measurement. It doesn't change
the worth of its member companies. It may give a temporary boost to some share
prices (Goldman Sachs, Nike, Visa) and penalize others (Alcoa, Bank of America,
Hewlett-Packard), but that's short-lived.

Further, changes in the DJIA over its lifespan—not just changes to the
stocks tracked but the weighting multiplier of the index itself—make the
index difficult to analyze over the long term. Sure, the fact that the Dow hit
18,000 points in late 2014 seems like an interesting figure, but it's an
impressive and round number based not on market capitalization but on stock
prices divorced from things like the [P/E Ratio](https://trendshare.org/how-to-invest/what-is-the-pe-ratio) or [dividend yield](https://trendshare.org/how-to-invest/what-is-dividend-yield) suggest that
the measurement is arbitrary and artificial.

It represents *something*, but does it represent something worth
acting on? This is one persistent and strong criticism of the DJIA. It's
scorekeeping without intrinsic meaning.

What's still important—and what hasn't changed—is that the long
term value of a company still depends on how much money it can generate for its
owners. The presence or absence of a stock in any index is irrelevant to the
quality of the business. Buy good companies. That's how to build wealth by
investing.