over 3 years ago • 2 mins
When Apple splits its stock on Aug. 28 – dividing its share price by four by giving three additional shares to each investor – it will have a dramatic impact on one of America’s oldest market indexes.
The split will cut Apple’s share price from well over $400 to more like $100 – making a whole share more accessible to retail investors. Go back a few decades and the data shows a split is positive for a stock’s price, perhaps because it suggests management confidence in the company’s future.
Traders on the Robinhood app have certainly gotten excited. They added more shares of Apple than any other company in the past week, even though the effect of stock splits may be fading with the advent of fractional share trading.
But, beyond the effect on Apple itself, this split will make a huge dent in one of the world’s most widely followed stock market gauges: the 124-year-old Dow Jones Industrial Average.
The Dow is an odd index. Whereas the vast majority, like the S&P 500 and FTSE 100, are “capitalization weighted” – giving more weight to moves in bigger companies – the Dow is “price weighted”. This means it, rather unintuitively, gives more weight to companies with larger absolute share prices. So a company with shares worth $200 has twice the weight as one worth $100. This is basically a historical quirk because, back in 1896, it made the math easier.
Even so, for plenty of people the Dow’s performance is synonymous with the stock market. According to DataTrek, Americans google “Dow Jones” seven times more than they search for “S&P”.
In the popular imagination, the Dow’s performance is the stock market’s performance. And lately it’s been lagging well behind the S&P 500, thanks to the latter’s more accurate reflection of the stock market – which has given it a larger weighting of high-performing technology stocks.
And the Apple split will steer the Dow even further away from tech, cutting Apple’s weighting from 11.2% to about 2.8% and the weighting of the entire tech sector from 27.3% to 20.6%, according to DataTrek.
So, if you think tech stocks will continue to beat the wider market and you want to invest in a broad exchange traded fund (ETF) tracking the US stock market, avoid those following the Dow and stick to market-value weighted indexes like the S&P 500 or Russell 3000.
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