Dow Fans Get Their Wish: Apple is Coming

In perhaps the biggest addition to 130-year old blue chip index, the Dow Jones Industrial Average will add Apple (NasdaqGS: AAPL) after the close of trading on March 18. The addition of Apple, the world’s largest company by market value, comes at the expense of AT&T (NYSE: T).

Whether by way of the old American Telephone & Telegraph Co. or its current incarnation, AT&T has been a member of the Dow since 1939.

“The index change was prompted by Visa Inc.’s (NYSE:V) 4:1 stock split which is scheduled to be effective at the same time. The post-split adjusted lower price of Visa will reduce the weighting of the Information Technology sector in the index. Adding Apple to the index will help to partially offset this reduction,” said S&P Dow Jones Indices in a statement.

Apple’s addition to the Dow could be a boon for the SPDR Dow Jones Industrial Average ETF (NYSEArca: DIA). As the tracking ETF for the Dow, DIA will rapidly become a credible Apple ETF because of the Dow’s price weighting methodology. [Apple’s ETF Impact]

Visa entered today as DIA’s largest holding at a weight of 9.7%, but the aforementioned split will lower that stock’s price, though not its market value, thereby lowering the Dow’s weight to Visa. Assuming Apple and the Dow stay relatively flat in the days leading up to the iPad makers addition to the index, Apple will enter DIA as the ETF’s fifth-largest holding behind Goldman Sachs (NYSE: GS), 3M (NYSE: MMM), International Business Machines (NYSE: IBM) and Boeing (NYSE: BA). [Dow’s Index Flaws]

Boeing, currently DIA’s fifth-largest holding, accounts for almost 5.5% of the ETF. The Dow’s addition of Apple, though something many investors and indexing aficionados had clamored for for several years further highlights the flaws of the price weighting methodology. IBM with a market value nearly $600 billion less than Apple’s will be DIA’s largest tech holding. Tech is currently DIA’s second-largest sector weight at 19.15%, trailing only industrials at 19.46%.

Interestingly, AT&T is not DIA’s smallest holding. Coming into Friday, Intel (NasdaqGS: INTC), Cisco (NasdaqGS: CSCO) and General Electric (NYSE: GE) all had smaller weights than AT&T in DIA.