On Friday S&P Dow Jones Indices announced that Apple will be added to the Dow Jones Industrial Average after the market close on March 18th.
What’s in it for Apple
Apple was certainly well-known last week before the announcement that it will join the DJIA. However, its entry into an exclusive club defined by The Dow, the oldest and most followed market measure, still confers more recognition. One comment on Seeking Alpha said Apple is now an adult. There may not be a universal definition of what a Blue Chip stock is, but no one will argue now that Apple doesn’t qualify. Much the same could be said for the other companies in the DJIA – any company joining The Dow is already an established leader with a history of success.
One thing that Apple isn’t likely to get by joining the Dow is a pop in its stock. At times in the past companies being added to one of a few key indices saw their stock gain as index funds and ETFs tracking the index bought shares. The “index effect” or “index pop” has been widely studied in the S&P 500®. In recent years some stocks joining the S&P 500 experienced a temporary gain of 3%-6% which was given back over the next few months. The funds tracking the S&P 500 are orders of magnitude greater than the approximately $30 billion tracking The Dow. Not enough buying is likely to be generated to even briefly move a stock as large as Apple.
While there is no price or index effect, there is a “list effect” for both The Dow and the S&P 500. Apple is now on the list of Blue Chips — when a journalist wants to talk to a leading company or try to interview a famous CEO she will look at the list. The same is probably true of a Congressman seeking a campaign stop that will get him on the evening news or in someone’s Twitter feed. One advantage of The Dow list compared to the S&P 500 list is that the former isn’t likely to be used as a hunting ground for takeover targets. More than half the exits from the S&P 500 are caused by companies being taken over, often by another company in the same index.
What’s in it for The Dow
The market changes, the economy shifts and the Dow changes as well. Only one company, GE, of the current 30 is an original member from 1896, and it is very different today from what it was 119 years ago. Adding Apple to The Dow is another change in a long list off entries and exits that keep the DJIA representative of current Blue Chips. As long as the economy grows and the markets change, there will be more changes to The Dow.