Amazon.com Inc. (NASDAQ:AMZN) is set to become part of one of Wall Street’s most venerable and exclusive stock indexes: the Dow Jones Industrial Average. This move will officially occur before the opening of trading on Monday, with Amazon replacing Walgreens Boots Alliance among the 30-company index.

S&P Dow Jones Indices facilitated Amazon’s inclusion in the Dow and Walgreens’ departure to rebalance the index following a 3-for-1 stock split by another Dow constituent, Walmart. Seattle-headquartered Amazon will now stand shoulder to shoulder with industry stalwarts such as Apple, Boeing, JPMorgan Chase, and Coca-Cola within the Dow.

Understanding the Dow Jones Industrial Average

The Dow represents a collection of 30 stocks from established and renowned companies, often referred to as “blue chips,” which are typically considered stable and secure investments. Despite its name, the index doesn’t solely comprise industrial firms like Caterpillar and Honeywell; it has evolved to include various sectors. Recent additions have introduced big names from the technology sector, such as Apple, Intel, and Microsoft.

The Reasons Behind Amazon’s Inclusion and Walgreens’ Exclusion

Amazon’s entry into the Dow and Walgreens’ exit stem from Walmart’s impending 3-for-1 stock split. This action will reduce Walmart’s stock price, impacting its weighting within the price-weighted index. To rebalance, S&P Dow Jones Indices opted to remove Walgreens, which currently holds the lowest stock price among Dow components, and add Amazon.

Additionally, Amazon’s inclusion aims to enhance the Dow’s exposure to consumer retail, aligning it with the evolving landscape of the American economy. Following these changes, Amazon will rank 17th among the Dow’s 30 stocks by weight, while Walmart’s weighting will drop from 17th to 26th. UnitedHealth Group will maintain its position as the index’s most heavily weighted stock.

Is the Dow the Premier Measure of Wall Street?

No, despite its historical significance, the Dow represents only a fraction of the market. Professional investors often turn to broader indices like the S&P 500, which encompasses nearly 17 times as many companies as the Dow. The S&P 500 is more widely used as a benchmark, with significantly more investment tied to it than the Dow.

Understanding the Differences Between the Dow and the S&P 500

While the performances of these indices have historically correlated closely, recent years have seen notable divergences. The S&P 500, with its heavier focus on Big Tech stocks, has outpaced the Dow, which has a more varied composition. Factors such as expectations regarding interest rates and the surge in AI-related technologies have propelled specific stocks within the S&P 500, contributing to its outperformance relative to the Dow.

Importance of the Dow’s Historical Significance

Despite its limitations, the Dow’s long-standing presence in the market makes it a valuable reference point for investors. Previously, significant moves in the Dow served as shorthand indicators of market activity, although their significance has diminished over time.

In essence, while the Dow remains a venerable institution within the financial world, its influence as a market indicator has waned in comparison to broader indices like the S&P 500.

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