What Happens When Your Stock is Added to or Booted From DJIA

by Jeff Hirsch, Almanac Trader

Congratulations to Apple (AAPL) for being added to the Dow Jones Industrial Index. Frankly, it is about time. AAPL is the largest company by market cap in the world and one of the most influential. What apparently made this possible is a 4 for 1 stock split by Visa (V). Since DJIA is a price-weighted index, the split by V reduces technology’s share of DJIA to a level that makes room for AAPL. However, this move really puts all the markets eggs in one basket. AAPL is already about 15% of QQQ and about 4% of SPY. I would expect this move to increase DJIA’s volatility in coming months.

In the following table, each DJIA component change back to 1999 has been separated into two tables. The first table is the performance of the stocks that left the index and the second is the stocks that entered. Generally speaking, 1-month after the switch, new stocks tended to be losers regardless if the switch was made in a bull or a bear market. Stocks that left the index most recently, in the current bull market, tended to perform much better, both 1-month and 1-year after they were removed. Kraft got the boot from the DJIA when it split into Kraft Food Group (KRFT) and Mondelez International (MDLZ). GM and Kodak both ended up bankrupt. Today’s GM and Kodak are not the same companies they were when they were included in DJIA just as today’s Sears Holding is not the old Sears Roebuck.

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