Index Churning

                                                                                                                                                                                  March, 2015

Most people think of the major stock indexes as a stand-in for a certain sector or category. The S&P 500 represents large companies, the Russell 2000 tells you what small capitalization stocks are doing, and the Dow represents broad economic sectors. You see tables showing the return of these indices over decades of time, and you might assume that they are made up of the same stocks during that time period, instead of trading in and out of stocks like a mutual fund.

But in fact, all of these indices are somewhat actively-managed, in the sense that they move stocks in and out of the index on a regular basis. This became news when the Dow Jones Industrial Average decided to add the biggest company in the world—Apple—to its mix of 30 stocks, replacing AT&T. The Dow has changed slowly but regularly over time; of the 12 stocks in the index when it was announced in 1907, only General Electric remains on the list. Only four companies remain from the 1935 list: GE, DuPont, ExxonMobil and Procter & Gamble. 

Since 2010, some notable names were dropped: The New York Times Company, Tribune Co, Office Depot, Eastman Kodak, Qwest Communications, Bethelehem Steel, Owens-Illinois, Novell, Radio Shack, National Semiconductor, Janus Capital Group, Sara Lee Corp, Sears Holding Corp., H. J. Heinz, Sprint Nextel, Advanced Micro Devices, J.C. Penney, Abercrombie & Fitch, U.S. Steel Corp., and Safeway, Inc. 

How will substituting Apple for AT&T affect the Dow? Since the Dow is weighted according to the share price of each stock, we can expect movements in Apple stock to greatly affect how the Dow performs going forward. When Visa International undergoes its anticipated four-for-one stock split, Apple’s $100 shares will become the biggest component of the Dow, and a $10 drop or rise could lead to a 100-point movement in the overall index. A $33 stock like AT&T would have been far less likely to rise or fall by that dollar amount.

Bigger picture, when you look at the long-term performance of an index, remember that this is not achieved with the same mix of stocks throughout that history. The indices may “trade” more slowly than most mutual funds, but they’re turning over their portfolios over time as well.

Sincerely,   

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

 

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http://www.investmentnews.com/article/20150306/FREE/150309932/apple-joining-dow-could-leave-clients-overexposed-to-tech-giant?NLID=daily&NL_issueDate=20150306&utm_source=Daily-20150306&utm_medium=in-newsletter&utm_campaign=investmentnews&utm_term=text

http://beginnersinvest.about.com/od/marketsexchangeindices/a/dow-jones-industrial-average.htm?utm_term=what%20stocks%20are%20in%20the%20dow%20jones&utm_content=p1-main-1-title&utm_medium=sem&utm_source=msn&utm_campaign=adid-0ab65503-ca11-4a7d-b1d6-cd786bfd6d2c-0-ab_msb_ocode-22879&ad=semD&an=msn_s&am=broad&q=what%20stocks%20are%20in%20the%20dow%20jones&dqi=how%2520many%2520stocks%2520in%2520the%2520dow%2520jones%2520industrial%2520average%253F&o=22879&l=sem&qsrc=999&askid=0ab65503-ca11-4a7d-b1d6-cd786bfd6d2c-0-ab_msb

http://en.wikipedia.org/wiki/List_of_S%26P_500_companies

http://en.wikipedia.org/wiki/Dow_Jones_Industrial_Average

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.