Wall Street's blue-chip index is getting a shake-up this week that will make its roster look more modern and potentially help reverse its recent underperformance.
On Monday, Amazon officially becomes a member of the Dow Jones Industrial Average, replacing Walgreens Boots Alliance. Shares of the dominant e-commerce platform have surged more than 80% over the past year, making it one of several large stocks that have powered the S&P 500 to new highs while the Dow has struggled to keep up.
The Dow is a smaller average than the S&P 500, with just 30 components, and it's weighted by the share price of the individual stocks rather than the companies' total market value. That makes some investors view the Dow, begun in May 1896, as a poor representation of the American stock market.
As technology has become a larger part of the U.S. economy and market over the past two decades, the industrial-heavy Dow has perpetually been playing catch-up in gaining more exposure to the fastest-growing companies. The three largest tech stocks in the Dow by market cap as of Friday were Apple, Microsoft and Salesforce, while key companies such as Nvidia and Alphabet were excluded.
Amazon is officially a consumer discretionary stock, according to a commonly followed classification system, but it is broadly accepted as a tech giant, and its addition will help chip away at the gap between the Dow and the S&P.
"The NDR Tech Titans Index consists of nine mega-cap stocks," Ned Davis Research chief U.S. strategist Ed Clissold said in a note to clients Monday. "The addition of Amazon puts four of the nine in the DJIA. However, the DJIA is still 11.6% points underweight the Tech Titans versus the S&P 500."
That discrepancy has been causing the Dow to underperform during the recent tech-led rally. Over the past 12 months, the S&P 500 is up 28%, while the Dow is ahead 19%. The trailing 12-month correlation between the two averages is now in the bottom 20% since 1926, according to NDR.
The addition of Amazon does not necessarily mean the Dow is due to rally. In fact, history shows that stocks that are kicked out of the Dow often outperform their replacements, at least in the short term.
But the change could still be the right move even if just to show that the Dow, now managed by S&P Dow Jones Indices, a joint venture majority-owned by S&P Global, is keeping up with the times.
"Adding a Tech Titan could help keep the most widely known equity benchmark relatable to investors," Clissold's note said.
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