09/17/2020

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Major Indexes Undergo Updates



Three New Members Joining the Dow Jones

The Dow Jones Industrial Average announced that several new companies will join the index, and others will be removed, starting on August 31. Pfizer (PFE) and Raytheon Technologies (RTX) will no longer be a part of the index. ExxonMobil (XOM), which joined in 1928, will also leave the group of bluechip stocks. General Electric (GE), the last remaining member from the Dow’s original lineup, left the index two years ago.

Salesforce (CRM), Amgen (AMGN), and Honeywell (HON) will replace the three companies making an exit. The Dow’s leadership say they see these companies as more reflective of the current American economy. Apple’s four-for-one stock split helped prompt the change seeing as how its lower price would reduce the Dow’s exposure to the technology sector on a price-weighted basis.

A Difference in Scale

There are roughly $31 billion indexed and benchmarked to the Dow. Changes to the index do matter, but changes to the S&P 500, which has about $12 trillion indexed and benchmarked to it, are of much greater consequence.

While investors are following the Dow Jones shake ups, many are even more eager to see how changes to the S&P 500 unfold—specifically if and when Tesla (TSLA) will be added to the index. At the end of July, Tesla reported a fourth consecutive profitable quarter. This means the electric vehicle maker qualified to join the S&P 500.

Since then, weeks have passed, and investors are buzzing with questions. Tesla’s stock is up about 380% year-to-date. The company recently announced a five-for-one stock split, which pushed shares up 39%, begging the question of whether or not it will be added.

A Look at Previous Additions

The decision to add Tesla to the S&P 500 would be made by the S&P 500 selection committee. However, just because Tesla meets the requirements for the index, it is not guaranteed that the committee will add it. It could be the case that the committee wants to see more consecutive quarters of profits and a bottom line number that’s less dependent on regulatory credit sales.

Nevertheless, when looking at historical changes to the S&P 500, on average the committee has announced a new inclusion 43 days after the eligible company’s last earnings report and 39 days after its last quarterly or annual filing. Companies like Twitter (TWTR) and ServiceNow (NOW) were added 32 days and 25 days, respectively, after their quarterly filings. Tesla filed its quarterly 10-Q on July 28, so by Twitter and ServiceNow’s standard Tesla could have been added as soon as yesterday or today. A broader average suggests Tesla could also be added as late as September 4.

In summary, while there’s no guarantee the EV company will be added, investors will have their eyes on the index to see if and when it ultimately makes the list.


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