Dow 30: Apple Split Impact

Last week, technology giant Apple (AAPL) surprised the street when it announced a four for one stock split. While the stock has rallied tremendously so far this year, a $400 or so price is nothing compared to many of its peers that trade well into four digits. While the split won’t necessarily change the fundamentals of Apple in the short term, it will have a major impact on the market’s most discussed index.

(Source: Google images, seen here)

As a reminder, the Dow Jones Industrial Average (or “Dow 30”) is a price weighted index. Thus, it does not matter if your market cap is $100 billion or $1.5 trillion. Your weighting is based on stock price, so a stock that trades for $200 has double the weight as one that trades at $100. For investors, the best way to have exposure to the index is an ETF, like the SPDR Dow Jones Industrial Average ETF (DIA), sometimes nicknamed the Dow Diamonds.

It is not uncommon to see a change like this occur in the Dow 30, although it doesn’t happen that often. Replacing one stock with another can change the physical composition of the index, but stock splits change the weighting among all of the components. A good example of this was when credit card giant Visa (V) underwent a similar four for one split in 2015, which eliminated that name as the largest weight in the Dow 30.

Apple has the largest market cap of any US traded name, so it has the largest weight in the S&P 500 and Nasdaq Index, as those indexes are based on market cap. However, not all investors might have realized that Apple’s share price above $400 also made it the top weight in the Dow 30, and by a considerable margin as seen on the DIA holdings page. Friday’s big rally in Apple shares gave it an even more outsized weight, above 11% (using actual prices as detailed below).

To show you what would essentially happen after the split goes through, I added up all the closing prices from Friday for the Dow 30. I then factored in the Apple split, and below you can see the impact on what would theoretically be the new top 5 in the Dow (as prices will change a bit over the next 4 weeks and there is one other name that could possibly jump into this group). The new top five would include UnitedHealth (UNH), Home Depot (HD), Microsoft (MSFT), Goldman Sachs (GS), and McDonald’s (MCD).

(Author’s note, increases above may look off due to rounding)

At just over 3% in this example, Apple would drop to the 16th largest component of the Dow 30. Each of the other 29 components of the index gain a little more than 9% additional power. The Dow also gains a bit more overall balance, as the top 5 components go from 36.24% of the index to 32.98%. Perhaps the most important thing here is that the largest weight goes from over 11% currently to under 8.6% in this example.

With Apple announcing a stock split last week, the Dow Jones Industrial Average will be shaken up a bit. The technology giant will no longer be the top weight in the index, resulting in some minor selling of Apple by any funds that track the Dow 30, while all other components will gain an extra chunk of weight. With the total share price of all these names combined coming down a little thanks to the split, it will mean a dollar of movement for each will have a little more impact moving forward on the Dow’s daily movement.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.

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