The SPDR Dow Jones Industrial Average ETF (NYSEArca: DIA) and other exchange traded funds that track the Dow Jones Industrial Average could shed one of their most famous components.
After ranking as the worst-performing member of the blue-chip index last year, General Electric Co. (NYSE: GE) is down nearly 8% year-to-date, bringing its 12-month loss to about 46%. That makes the stocks vulnerable to removal from the Dow, according to at least one analyst.
We believe the chances that GE could be removed from the Dow are increasing as GE continues to face substantial challenges including earnings and cash pressure, tough global power generation markets, aggressive downsizing, shrinking its portfolio, management shake-up and SEC investigations,” Deutsche Bank analyst John Inch wrote Wednesday, reports CNBC. “Apart from GE’s other challenges, as the company’s absolute share price has continued to drop, GE increasingly falls into the category of outlier and consequently a likely candidate for removal.”
The Dow is a price-weighted index, a methodology reflected in DIA. That means the stock with the highest price tag in the Dow, in this case Boeing Co. (NYSE:BA), receives the largest weight in the index. Conversely, the stock with the lowest price tag, that being General Electric, is the Dow’s smallest component.
Other Dow ETFs include the the Guggenheim Dow Jones Industrial Average Dividend ETF (NYSEArca: DJD), which weighs the 30 Dow stocks by yield. DJD, which tracks the DJIA Yield Weighted Index, allocates 2.9 percent of its weight to GE.
“Despite the better performance Wednesday, the industrial conglomerate has proven a bane for investors in the past several years, recently slashing its dividend and tempering profit expectations,” according to CNBC. “The stock is down 55 percent over the past 10 years, including a 46 percent decline in just the past 12 months.”
The Dow is composed of the 30 largest companies in the U.S. across a number of sectors. Holdings are selected by the editors of the Wall Street Journal.
Since the index follows price-weighted methodology, components with higher prices will have a larger impact on the daily movements in the Dow, which has drawn some criticism over its somewhat arbitrary weighting method. Daily changes in the Dow are calculated by adding prices of the 30 Dow stocks and then divided by the “Dow Divisor.”
The First Trust Dow 30 ETF (NYSEARCA: EDOW), which debuted in August, attempts to equally weight the 30 Dow stocks, but GE is the smallest member of that ETF’s lineup at 2.85%.
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