Investors and advisers who own shares of Apple Inc. (AAPL) cheered the news that it will soon be in the granddaddy of all stock indexes. But in all the hoopla, they may miss the fact that their portfolios could become overexposed to the tech giant.
On March 19,
Apple is slated to replace AT&T Inc. (T) in the 119-year-old Dow Jones Industrial Average. The news sent Apple shares up $1.05, or 0.83%, to $127.46, in afternoon trading Friday as the Dow tumbled 1.44%.
As investible indexes go, the Dow is far from the most popular, but $12.5 billion of assets are invested in the SPDR Dow Jones Industrial Average ETF. And DIA soon will include the tech giant, joining the S&P 500 and a plethora of mutual funds and exchange-traded funds that already own it.
“Apple is already a widely held stock, both individually and through various funds, and with its addition in the Dow, you could see some overlap in investor portfolios,” said Todd Rosenbluth, director of mutual fund and ETF research at S&P Capital IQ.
Apple,
which started paying a dividend three years ago, is a Top 10 holding in a dozen dividend-focused ETFs that include Vanguard High Dividend Yield (VYM) and Wisdom Tree Total Dividend (DTD), as well as the Russell 1000 Index through iShares Russell 1000 (IWB) and iShares Russell 1000 Growth (IWF).
“There are probably some people who own the S&P and the Dow, and now they will own Apple in both indexes,” Mr. Rosenbluth said. “But, obviously, Apple is not the only stock held in multiple indexes.”
Part of what makes Apple's move into the Dow unique for investors is the price-weighted makeup of that particular index.
Unlike the S&P 500, which is constructed according to each company's market capitalization, company weights in the Dow are determined by share price, which means that Apple's share price of about $127 through midday trading Friday would have a bigger influence on the Dow's overall volatility than does AT&T, which is trading around $33.
“They're throwing out AT&T, which is a low-beta, low-volatility stock, and replacing it with a very expensive high-beta, high-volatility stock,” said Paul Schatz, president of Heritage Capital. “There's no doubt that the Dow becomes more volatile with Apple in there.”
As a price-weighted index, the Dow has a total value calculated based on a seven-to-one multiplier.
“The more expensive the stock, the more its daily price movement will move the Dow,” Mr. Schatz said. “If Apple shares go down $10, which is likely, that could lead to a 100-point drop by the Dow. But a $33 stock like AT&T is much less likely to drop $10 in a day.”
Apple's impact on the Dow would have been considerably larger had it not undergone a seven-for-one stock split in June, which trimmed the share price from more than $700.
At more than $272 a share, Visa Inc. (V) is the highest-priced stock in the Dow, but Visa is scheduled for a
four-for-one stock split on the same day Apple will be added to the index.
The Visa stock split will make Goldman Sachs Group Inc. (GS), at $188 a share, the highest-priced stock in the index, followed by 3M Company (MMM), at $165 per share.
“The addition of Apple will definitely make the Dow more volatile, because it's an expensive stock and it's more volatile than AT&T,” said Mr. Rosenbluth. “That's an important point for investors to understand.”
Theodore Feight, owner of Creative Financial Design, is a big fan of Apple and is among those who believe more access to it is a good thing.
“Almost all my clients have got a lot of Apple through different indexes, and I'm glad to see it go into the Dow,” Mr. Feight said, recognizing the runup to the March 19 addition most likely will push the share price higher.
“I'm not worried about having too much Apple, because I think Apple is going to be around for a long time,” he said.
