The background of NVIDIA joining the Dow Jones: NVIDIA has long prepared for inclusion, and the Dow Jones also needs NVIDIA
NVIDIA has surpassed Intel to become the chip manufacturer with the highest revenue, creating a significant one-to-one swap opportunity. Since Intel is the only chip manufacturer in the Dow Jones Industrial Average, the industry's weight in the Dow is much lower than its position in the economy or market. It is important to note that the Dow is a price-weighted index, so stock prices and their volatility determine their weight in the index. Analysis estimates that NVIDIA ranks eighth in terms of its impact on the Dow Jones Index
Last Friday, after-hours news from the U.S. stock market indicated that NVIDIA would replace Intel in the Dow Jones Industrial Average, with the change set to take effect before the market opens this Friday, November 8. This news propelled NVIDIA's stock price to rise on Monday, peaking over 2.6% during the session and closing up nearly 0.5%, outperforming the broader U.S. market.
Over the past two years, as artificial intelligence has become the dominant theme in the global market, NVIDIA's market capitalization has surged, making it one of the most important companies in the world, even surpassing Microsoft in market value and rivaling Apple. The two largest companies by market capitalization in the S&P 500 and Nasdaq 100 indices are Apple and NVIDIA, with their relative rankings fluctuating with market changes. As of Monday's close, NVIDIA's market capitalization ranked as the second largest in the world.
What impact will NVIDIA's addition to the Dow have on the index?
It is important to note that the Dow is a price-weighted index, so a company's market capitalization does not significantly affect the index; rather, the stock price determines how much influence a stock has on the Dow Jones index. This is why UnitedHealth typically has the greatest impact on the Dow, with its stock closing at $557.77 on Monday. Goldman Sachs also has a stock price exceeding $500 and frequently ranks among the stocks with the most significant influence on the Dow.
Based on Monday's closing price, NVIDIA's stock ranks 21st among the 30 components of the Dow Jones index, while Intel, which is about to be removed from the index, is the cheapest component, closing at $22.52 on Monday.
However, what matters is not just the stock price; volatility is also a key factor. By considering stock prices and historical volatility, one can estimate each stock's potential impact on the Dow Jones index. After analyzing data from FactSet, CNBC estimated that NVIDIA ranks eighth in terms of its impact on the Dow Jones index. NVIDIA's high volatility compensates for its relatively low stock price.
Analysts believe that price-weighted indices like the Dow have some limitations. NVIDIA is one of the most important stocks in today's market, and the stock underwent a 1-for-10 stock split in June of this year, with analysts suggesting that this move might have been to prepare for inclusion in the Dow. Prior to this stock split, it may not have been included in the Dow Jones index. Although the price per share was once very important, fractional trading and ETFs have rendered this significance largely outdated. The price per share only truly matters in options trading, where contracts are often for 100 shares.
The tech stock composition in the Dow
With NVIDIA surpassing Intel to become the highest-revenue chip manufacturer, a clear one-to-one substitution opportunity has emerged. Since Intel is the only chip manufacturer in the Dow, the industry's weight in the index is far lower than its position in the economy or market.
Including NVIDIA, four of the six trillion-dollar market cap companies in the U.S. tech sector are now part of the Dow Jones index. Amazon joined the Dow in January of this year, increasing the representation of the internet sector in the index.
Google's parent company Alphabet and Meta remain excluded from the Dow. If these two companies are to join the Dow, it may take a long time. For them, there are no obvious Dow members to replaceAmong them, Alphabet's situation is slightly more complex, as both its Class A and Class C shares are publicly traded. Meta's stock closed at $560 on Monday, which would make its weight in the Dow Jones Industrial Average the highest if included, even slightly surpassing UnitedHealth.
Given the overall representation of the technology sector in the Dow has increased, there are no obvious moves to include large tech stocks in the future.
In addition to NVIDIA replacing Intel, Sherwin-Williams will also join the Dow, replacing Dow Inc. After this adjustment, the weight of the technology sector in the Dow Jones Industrial Average will rise from 18.9% to about 19.5%, despite its market weight being around 58%.
Industry insiders believe that NVIDIA's inclusion in the Dow is expected to boost the entire artificial intelligence ecosystem.