Dow Jones: Learn some basics

 Here is the article written on August 27, 2020. 

Three of the 30 stocks that make up the Dow Jones Industrial Average will be replaced at the end of this month. Standard & Poor's, which manages the blue-chip index, announced on Monday that current constituents ExxonMobil (NYSE:XOM), Pfizer (NYSE:PFE), and Raytheon Technologies (NYSE:RTX) will be swapped out with Salesforce.com (NYSE:CRM), Amgen (NASDAQ:AMGN), and Honeywell International (NYSE:HON), respectively.

Updates of the Dow's components aren't unusual. Not including changes stemming from mergers and acquisitions, Standard & Poor's altered the Dow's components most recently in 2018 when it replaced General Electric with Walgreens Boots Alliance. Like the recently announced restructuring, that one was ultimately intended to make the Dow a more accurate cross-section of the U.S. market.

Still, when 10% of an entire index's holdings are scheduled for replacement in one sweeping move, it could lead buy-and-hold investors that own Dow-based index funds to wonder how much buying-and-holding they're really able to do with those instruments. If that's you, don't worry. The overdue move actually makes it more comfortable for long-term investors to own Dow-based ETFs and mutual funds.

Interesting facts to learn 

Down Jone is related to price

The explanation touches on something not fully clarified within the announcement. Unlike most other indices that assign a "weight" -- or degree of influence -- to a holding based on that company's total capitalization, the Dow Jones Industrial Average is a price-weighted index. For example, constituent shares priced at $100 apiece cause more net change for the Dow than shares of a $50 stock do, even if that $100 stock represents a smaller organization. It's entirely possible the smallest name in the Dow (as measured by market cap) could still make the biggest impact on the index's daily point changes if that company's stock was the highest-priced ticker among the 30 that make up the Dow Jones Industrial Average.

In other words, the pricing methodology used creates a situation where the Dow isn't necessarily an accurate, collective reflection of the stock market's most established names.

Before - Dow Jones - heavy on Apple, at end of Sept, it will not since Apple splits shares 

Maybe you liked the Dow's mix as it was: heavy on Apple, pharmaceuticals, energy, and defense, but light on tech, biotech, and industrials. Maybe you're not a fan of Amgen, which posted encouraging quarterly numbers in July, but otherwise hasn't been a high-growth machine of late.