The esteemed benchmark for the SPDR Dow Jones Industrial Average ETF (NYSEArca: DIA) is undergoing its biggest shakeup since 2004 but the fund will keep its bias to high-quality companies, according to investment research firm Morningstar.
Earlier this week, S&P Dow Jones Indices said Goldman Sachs (NYSE: GS), Visa (NYSE: V) and Nike (NYSE: NKE) will join the index on Monday, Sept. 23. Bank of America (NYSE: BAC), Hewlett-Packard (NYSE: HPQ) and Alcoa (NYSE: AA) will get the boot. [Why Apple and Google Didn’t Join the Dow]
“Because the index weights its constituents by their share price, rather than by market capitalization, these changes will have a significant impact,” writes Morningstar fund analyst Alex Bryan.
“Both Visa and Goldman Sachs currently trade above $150, which will make them two of the index’s top three holdings,” he added. “They will also help take some of the weight out of IBM, which currently represents more than 9% of the index. In contrast, the three departing stocks account for less than 2.5% of the index combined.”
The Dow, which has been around since 1896, holds 30 stocks total.
The announced changes improve the sector representation of the index, said David Blitzer, chairman of the Index Committee at S&P Dow Jones Indices. The changes were not about trying to pick the best stocks, he added. [Indexology: The Dow — 3 for 3]
Although the Dow’s price weighting is a relic from the index’s rich past, it tracks a fairly diverse set of top-quality companies that approximates the industry composition of the U.S. stock market, said Morningstar’s Bryan.
DIA, the Dow ETF, offers investors a convenient way to replicate its performance and may be a suitable core holding, he notes.
“The fund only invests in mega-cap stocks and, therefore, does not represent a large segment of the U.S. market. However, most of these companies have sustainable competitive advantages that may help protect their profitability in bad times. In fact, more than two thirds of DIA’s assets are invested in companies with wide moats, Morningstar’s assessment of a firm’s competitive advantage,” Bryan wrote. “The corresponding figure for the S&P 500 is around 43%. As a result, DIA exhibited less volatility than the S&P 500 over the past 10 years, despite its more concentrated portfolio.”