How Will Apple Affect the Dow (and Who Cares, Anyway?)

Asking some of the obligatory questions as Apple (AAPL) gets named to the Dow Jones industrials

by Adam Warner

Published on Mar 9, 2015 at 9:22 AM
Updated on Jun 24, 2020 at 10:16 AM

Sure, Apple Inc.'s (NASDAQ:AAPL) market cap has grown larger than the entire rest of the world combined -- or something like that. But it still hadn't achieved the ultimate U.S. equity status symbol. That is, until Friday. From fellow Mets believer David Gaffen at Reuters:

"Apple Inc (AAPL.O), the largest U.S. company by market value, will join the storied Dow Jones industrial average .DJI, replacing AT&T Inc (T.N), in a change that reflects the dominant position of the iPhone maker in the U.S. consumer economy."

The big question is, of course, what does it all mean to AAPL and the index itself? Well, the Dow's kind of a poorly constructed index (news flash!) in that it's price-weighted … as opposed to the more sensible cap-weighted structure of basically everything else. AAPL right now will comprise about 4.7% of the Dow when it enters. That's not all that high, considering there are 30 stocks. It's less than half AAPL's weight in the Nasdaq Composite (COMP).

But that then begs the question of, who cares about the Dow? It's arguably the third most interesting of Dow's three major indexes; at least the transports and the utilities proxy sectors. The "industrials" aren't even actual industrials … it's 30 big companies in a poorly weighted index.

But hey, it's still The Dow! CNBC loves it, and uses it as the proxy for "the market" because … habit, I suppose? I caught a discussion on Friday about AAPL's future impact on Dow's volatility. And that really begs a "who cares?" question.

AAPL has higher volatility than AT&T Inc. (NYSE:T), and will comprise a greater part of the Dow, so it should slightly lift Dow volatility. It's not that simple, though. There's another part of the equation. How does AAPL correlate with the other components? Maybe it moves in perfect inverse to Exxon Mobil Corporation (NYSE:XOM) or International Business Machines Corp. (NYSE:IBM), in which case AAPL would actually negatively impact Dow volatility.

I doubt that's true, but really -- it doesn't matter even in the slightest, as there are few institutions running money benchmarks versus the Dow. Even fewer track or trade Dow volatility. If you're one of those few, yes, Dow volatility may nudge up very slightly.

The more interesting question is how the Dow inclusion impacts AAPL itself. Classically, stocks do relatively poorly after they enter major indexes. It's often because the entry into the index is not timely. The stock most likely made a big move to make it index-worthy in the first place. Additionally, index trackers buy the name before it goes in, and thus there's a reduction of demand once it's actually in. That theoretically will add volatility to AAPL itself.

But I really doubt any of that happens. Maybe there's a psychological reason to sell a stock entering an index, but there's not any noteworthy financial one here. It's already by far the biggest name in two much bigger indexes -- namely, the S&P 500 Index (SPX) and COMP. It's a fun story, of course, but it's not going to impact any trader's wallet, in my honest opinion.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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