New companies are coming to the Dow Jones
The Dow Jones Industrial Average will see some coming and going this week. Chipmaker Nvidia will replace its rival Intel on the stock index, and the paint company Sherwin-Williams will sub in for the chemical giant Dow.
The Dow is made up of 30 companies at a time, and the committee that decides on that list tries to represent key parts of today’s economy.
So, in the case of artificial intelligence leader Nvidia taking Intel’s place, “basically they’re swapping the new market leader in semiconductors for the old market leader,” explained John Blank, chief strategist at Zacks Investment Research.
For these companies, he said getting tapped to join a major index is like being invited into an exclusive club. “It does indicate economic health” — and economic relevance — “of the company,” he said.
Meanwhile, getting subbed out of the Dow “is a real kick in the pants,” said Hilary Kramer, chief investment officer with Greentech Research.
Getting dropped from a major index isn’t great for a company’s image or its stock value.
“The way we buy stocks today, instead of investing in individual stocks, we tend to buy ETFs,” said Kramer.
She’s referring to Exchange Traded Funds, or baskets of stocks, “which mirror indexes.”
It’s not just bad publicity when a company gets replaced, Kramer added. Fund managers then dump that stock from their portfolios en masse to make room for the new addition.
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