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Let me state right up front that I am not a fan of ETFs, Mutual Funds, Bond Funds, or Index Funds. I just feel that knowledgeable investors can do a better job than just putting their financial futures on auto pilot, while also leaving it in the hands of others who care less about us than they do about themselves.

That does not mean that there is not a place for these investment vehicles-- they are very popular and a good choice for many. I would just simply state, that if you are here, reading Seeking Alpha-- you yourself feel that you can do better, and want to take control of your own financial destiny. I applaud and support that!

Yesterday, Barron's came out with an article about the possibility of adding either Apple (NASDAQ:AAPL) and or Google (NASDAQ:GOOG) to the Dow Jones Industrial Average (DJI).

Google Inc. (<a href='http://seekingalpha.com/symbol/goog' title='Google Inc.'>GOOG</a>)

Apple Inc. (<a href='http://seekingalpha.com/symbol/aapl' title='Apple Inc.'>AAPL</a>)

You can read excerpts from the article right here. It states clearly:

"The Dow Jones Industrial Average stock index is due for an overhaul, and new-tech giants like Apple Inc and Google have good arguments for joining the elite 30 companies at the expense of old-industry stalwarts like Alcoa Inc, Barron's said on Sunday."

Can't get much more direct than that right?

It continues:

""The guardians of the Dow need to ensure that this benchmark, created in the 19th century, stays relevant for a 21st century market," it wrote."

I agree completely, so what is the problem?

Here is a biggie:

"Yet admitting Apple, the world's most valuable company with a market capitalization of roughly $563 billion, or Google, would be difficult, Barron's said, because of the way the index is calculated. Unlike the Standard & Poor's 500 and other major indexes, the Dow weighs its 30 components based on the absolute price of their shares."

Well this is an eye opener to many who might have thought that the Dow would be structured differently than this simple metric. But unless it is not addressed and changed, as well as adding those 21st century big blue chips, it could create some very significant dangers for index funds that play in the Dow averages.

So What Am I Saying?

Apple and Google shares have a price tag of roughly $600/share right now, give or take a few bucks. According to the article:

"Apple, whose shares on Friday closed at $603, would overwhelm the index with a 26 percent weighting"

Now, add Google to that, and the Dow could be weighted by roughly 40% in these 2 stocks alone. That would mean that for every 1% move in both of these stocks combined would make up between a .40-.50% move in the entire Dow average.

Let me do some simple math, which of course is the only kind I know how to do anyway!

  • The Dow is having a good day, with all stocks up on wonderful economic news. Without Apple or Google counted, the index is up 2%. Apple and Google are up on their own by 3% each (hypothetically), so the Dow is not up 260 points, but up over 400 points approximately ( just by the Apple/Google "effect").
  • Conversely, the Dow is having a profit takers day and is down by 1% or 130 points, while the Apple and Google tandem are down about 2%. Bake in the Apple/Google "effect" and the Dow could be down between 250-300 points just because of those 2 stocks.
  • The Dow is flat and Apple and Google are down 1% respectively. That could mean on a no news flat day, the Dow could be down 0ver 100 points roughly (let's say 75-100). The absolute reverse occurs and on a flat day, the Dow could be up 75-100 points just by a 1% upward move in the Apple/Google tandem.

I guess you can see where I am going with this by now, even if my math is off by a bit. I am certain some of my readers will gladly point out my error in calculation and math, as well as my theory, but I do not believe I am that far off.

To make the index work more efficiently, the article states:

"Barron's said the heavy weighting that Apple would command at its current share price could prove a barrier to becoming a Dow component. To guarantee a Dow spot, Barron's said, Apple would have to split its shares by five-for-one or 10-to-one. But Barron's noted that Apple has not split its stock since 2005."

Toss in the same "need" for Google for argument's sake. That leaves the control of the Dow up to 2 companies. Not very appetizing in my view.

I believe that an entire overhaul of the way stocks within the Dow are weighted (perhaps more like a mutual fund allocation perhaps) might be overdue, and could then include the big guns of today's market place without causing un-needed volatility. If the Dow simply includes Apple and Google (which they should in my opinion) without changing their own metrics, I would run-- not walk-- away from any index fund or ETF that could be playing with fire and too much volatility within the Dow.

Something to ponder as we move from earnings season into the "spring cleaning" season, wouldn't you say?

Source: Can Adding Apple And Google To The Dow Cause More Harm Than Good?