Apple CEO Tim Cook arrives for Apple’s Morning Show’s world premiere at Lincoln Center- David Geffen Hall on October 28, 2019 in New York.
Angela Weiss | AFP | Getty Images
The Dow Jones industrial average has relied on its powerhouse Apple to shake off its coronavirus damage, but that is about to change as the juggernaut’s stock split ends its dominance in the 30-stock gauge.
At Wednesday’s high of $ 468 that Apple squeezed into the $ 2 trillion association, the tech giant’s weight in the Dow stood at 11.4%, by far the largest. Apple’s split from 4 to 1, which takes effect on August 31, will lower its price to around $ 117 and start its ranking until the 16th and 17th. The new Apple weight in the Dow will fall to about 3.1%, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
The century-old index of blue chip is price weight, which means that stocks with higher stock prices gain a greater weight in the gauge. UnitedHealth has the second largest weight, at 7.8%. Most other stock indices are weighted by market capitalization, including the S&P 500 and the Nasdaq Composite. Apple has the No.1 position in the S&P 500 because of its peak market value.
Apple has contributed nearly 1,200 points to the Dow this year, as the stock has more than doubled since its low in March. Without Apple’s heavy lifting, the Dow could have a harder time playing the S&P 500 and the Nasdaq, which have all set their respective records for the pandemic. The Dow is still more than 6% below its record high of Feb.12 after playing more than 50% of its March low.
“Suddenly, it’s the only other big tech company that’s in it and has heavy weight on Microsoft,” said Tom Essaye, founder of The Sevens Report. “To make the Dow better, you really have to start improving the economy and that just doesn’t happen.”
The Dow, which largely consists of discretionary and industrial names of blue-chip consumers, is widely seen as a proxy for the general economic conditions. However, these fats have been some of the biggest victims of the coronavirus. As of Wednesday, two-thirds of Dow institutions for the year are still in the red, with a 48% decline in Boeing shares leading the losses.
Large technology stocks, on the other hand, have been a bright spot in a pandemic-driven market when investors stepped up in internet names whose businesses have proven to be done in a world of home-stay.
“Until we get a broad economic recovery, I don’t think we can expect the Dow to lead,” Essaye said.
The Dow was first created in the 1890s to model a portfolio of a regular investor – a simple average of the prices of all constituencies. But it can be an outdated method nowadays in a sea of passive investment cars given the lack of diversification and high concentration.
Effect on passive funds
The split of Apple could also have some impact on index fund and exchange traded fund managers, who miss the benchmark performance and changes.
For example, the SPDR Dow Jones Industrial Average ETF Trust (DIA), which has more than $ 23 billion in assets under management, follows the old-fashioned average. Holders of these passive funds will have to buy shares in the rest of the index companies to fit the big gap from their Apple sales to the split.
“It’s a four-for-one on the largest stock you have,” Silverblatt of S&P Dow Jones Indices told CNBC. “If you had the fund, you had 11% of your money at Apple. Suddenly you’re only in the 3%; you have a whole lot to sell.”
The split does not affect Apple’s top position in the market-weighted S&P 500, to be sure, what many more investors have money after that. A share split is when a company divides the existing shares of its share into multiple new shares. While the price of a share is affected, the total dollar value of the shares remains the same.
This will be Apple’s fifth stock split since going public in 1980. The tech giant’s last split came in 2014, which eventually led to its addition to the Dow.
Some analysts believe that a stock split can give an impetus to owner of retail stocks because the cheaper stock price is more accessible to individual investors. However, given Apple’s gigantic institutional ownership and the popularity of fractional trading, any impetus from the retail group could be minimal.
“I do not think a flood of retail investors will send the stock much higher after the split,” Essaye said. “I’m not entirely convinced that there are a ton of retail investors that Apple does not already have, especially if you have things like fractional trading. That takes some of the power out of the split.”
Vanguard, Berkshire Hathaway, BlackRock, State Street and Fidelity are by far the largest investors in Apple, collectively owning the $ 800 billion stake, according to FactSet.
– With the help of Nate Rattner.
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