The rise and rise of Apple is creating problems in the arcane world of index tracking, with changes now being considered to the venerable Dow Jones industrial average, the world's most famous stock market measure.
The Dow is supposed to be a gauge of America's industrial titans, but does not include Apple Inc., Google Inc. or Berkshire Hathaway Inc., three of the 10 biggest U.S. companies by market value. Standard & Poor's, which took control of the Dow Jones index business two months ago, has a problem bringing them in: because the 30-stock index is weighted by price, the three companies' soaring shares mean they would dominate it if included.
"Not being able to deal with Apple, Google or for that matter Berkshire Hathaway is an issue," said David Blitzer, chairman of the index committee for S&P DJ Indices. "This is an issue that we're just starting to think through and debate."
This year the Dow has risen just 11.6 per cent while the S&P 500, the most widely followed U.S. benchmark that includes Apple, Google and Berkshire, has jumped 16.1 per cent.
Apple's shares closed at nearly $700 on Friday and would have a 30-per-cent weighting if included in the Dow, according to Howard Silverblatt at S&P. Inclusion of Berkshire Hathaway's A shares, which trade at more than $134,000 each, would completely overwhelm the Dow even though the market value of Warren Buffet's investment company is lower than many existing members.
Established in 1896, the Dow is the second-oldest U.S. market index after its sister Dow Transports. Both were created by Charles Dow, founder of the Wall Street Journal. It is widely followed by private investors and the media as a measure of the health of the U.S. market, although fund managers have mostly moved on to more inclusive indices based on companies' market values rather than their share prices.
S&P expects to test investor appetite for changing the Dow at its next consultative meeting with major index users. Changes would be easy to make as there are only three rules for selecting members of the Dow: it cannot include transport companies or utilities and the editor of the Wall Street Journal must sit on its steering committee. Of the Dow's original members, only GE still remains.
"When I started my career, the Dow was much more relevant," said Mark Haefele, head of investment at UBS Wealth Management. "But most institutional investors have moved on from the index."
The Dow's long history has been punctuated by structural issues, with companies remaining members long after they have become stock market relics and big new businesses often ignored for long periods. Mr. Blitzer stressed, however, that there was no timeframe for making changes and the Dow's existing methodology could remain unchanged.