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Should Nvidia Become the Next Dow Jones Stock After Amazon?

Barchart - Wed Feb 28, 12:27PM CST

Beginning this week, the Dow Jones Industrial Average Index ($DOWI) officially added ecommerce giant Amazon(AMZN) to its 30-stock roster, replacing Walgreens Boots Alliance (WBA). It was a monumental move for the index, and the Dow's first change since 2020. It also raises the question - as the oldest U.S. stock market index takes on a more modern configuration after Amazon’s inclusion, should it also consider adding AI chip giant Nvidia (NVDA)? We’ll explore in this article.

About the Dow 30

Launched in 1896, the Dow Jones Industrial Average Index is among the oldest and most followed stock market indices globally. It’s a price-weighted index, which basically means that the weighting of its 30 constituents is determined by their absolute stock prices, rather than by their market cap - which is the case with most other benchmark indices, including the S&P 500 Index ($SPX).

Incidentally, none of the original Dow constituents are left in the group after the index removed General Electric (GE) to make room for WBA in 2018 – which has now been replaced by Amazon.

Prior to this week, the most recent Dow reorganization took place in 2020, when it replaced Exxon Mobil (XOM), Pfizer (PFE), and Raytheon Technologies - now RTX Corporation (RTX) - with Salesforce (CRM), Amgen (AMGN), and Honeywell (HON). Notably, that was the same year the S&P 500 Index added Tesla (TSLA) to its ranks, becoming the index's largest addition ever in terms of both its market cap and its weighting.

Why Did Amazon Join the Dow Jones?

S&P Dow Jones Indices, which manages the Dow Jones Index, replaced Walgreens Boots Alliance with Amazon because of Walmart’s stock split. Walmart's (WMT) weighting in the index dropped following its planned 3:1 stock split, since it’s a price-weighted index - and Amazon’s inclusion helped maintain the Dow's retail sector exposure.

In its statement, S&P Dow Jones Indices said, “Reflecting the evolving nature of the American economy, this change will increase consumer retail exposure as well as other business areas in the DJIA.”

Additionally, the S&P Dow Jones Indices replaced JetBlue Airways Corporation (JBLU)with Uber(UBER) in the Dow Jones Transportation Average ($DOWT) to “help the index gain exposure to the ride sharing industry.” Last year, the S&P 500 Index also added Uber to its ranks in a sign of growing importance of the ride-hailing and food delivery industry.

Why Does Inclusion in the Dow Jones Matter?

Inclusion in leading indices like the Dow is almost invariably positive for a stock. Inclusion in any index means that the passive funds and ETFs tracking that index will have to necessarily buy the stock in the same proportion, which leads to increased buying activity that supports higher prices.

Plus, inclusion in a benchmark index can act as a stamp of approval for the company’s prospects. For instance, Tesla’s inclusion in the S&P 500 in 2020 provided credence to the fact that electric cars are here to stay. Not that Tesla – or least of all its mercurial CEO, Elon Musk needed any outside approval regarding the company’s capabilities – but nevertheless, inclusion in the S&P 500 helped further support the rally in TSLA stock.

Should the Dow Jones Also Add Nvidia?

Just like electric cars were the buzzword between 2020 and 2022, artificial intelligence (AI) has been the talk of Wall Street over the last year. And on the topic of AI, it’s hard to avoid a mention of Nvidia, which became a $2-trillion giant earlier this month riding the AI wave.

I believe that Nvidia deserves a place in the Dow Jones based on the argument provided for Amazon and Uber. One of the reasons S&P Dow Jones Indices swapped in Uber for JetBlue in the Dow Jones Transportation Average was because of JBLU's low share price and resulting low weight – which was less than half a percent.

And looking at the Dow Jones Industrial Average, Intel (INTC) has the second-lowest weight, at around 0.70%, followed by Verizon (VZ) at 0.66%. Nvidia’s inclusion in the Dow 30 would help to reflect “the evolving nature of the American economy’” – the same argument provided for adding Amazon to the index.

Nvidia’s Stock Split Might Help

As ironic as it might sound, the stellar rally in Nvidia stock looks like the biggest stumbling block to the company joining the index. With a share price near $800, Nvidia could end up having a weight in excess of 13% in the price-weighted index. For context, UnitedHealth Group (UNH) and Microsoft (MSFT) – currently the two biggest Dow constituents – have a weighting of around 8.8% and 6.8%, respectively.

That said, a stock split by Nvidia – which is already something a lot of retail investors have been craving – might help tilt the scales in Nvidia’s favor. It was Walmart’s split that helped pave the way for Amazon’s long-due entry into the Dow Jones; could a potential Nvidia stock split play the same role for its inclusion in the index? We’ll have to wait and see, but excluding the AI behemoth from any index that seeks to capture the broader market and economy right now is a risk, as it might mean that the index does not reveal the true picture.

On the date of publication, Mohit Oberoi had a position in: AMZN , NVDA , PFE , TSLA , MSFT , INTC . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

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