Dow Jones Shakes Up: Nvidia Replaces Intel

On Friday, 1 November, S&P Dow Jones Indices announced a significant change to the iconic Dow Jones Industrial Average (USA 30) index effective this Friday, 8 November: Nvidia (NVDA) will replace Intel (INTC). This move reflects the evolving landscape of the technology and semiconductor industry and the growing dominance of artificial intelligence-driven companies in many indices.

While the chemical stock sector is also facing some changes within the index, as Sherwin-Williams (SHW) will join the index to replace Dow Inc., the spotlight seems to be on Nvidia’s addition to the index. Nvidia stock’s recent robust rise (around 170% so far in 2024, after a performance of +240% in 2023), driven mainly by Nvidia’s substantial contribution to the artificial intelligence industry, has made it a prime candidate for inclusion in one of the most traded American indices.

Let’s delve deeper into the implications of this change for traders and the broader market.

Understanding the DJIA Index

The Dow Jones Industrial Average (DJIA) index, comprising 30 prominent American stocks or “blue-chip” companies, is one of the global financial market's most influential and longstanding stock indices. Since its inception in the late 19th century, the DJIA has been a barometer of the U.S. economy. 

The index has evolved from focusing on industrial companies when the U.S. economy was primarily driven by manufacturing and heavy industry to including stocks of companies across diverse sectors today, adapting to shifts in the economy. 

As of October 2024, the DJIA includes all sectors except transportation and utilities, offering a more comprehensive market view. However, to ensure that the index’s composition always reflects the current economic landscape, the companies in the DJIA are managed by a committee at S&P Dow Jones Indices, which periodically reviews and adjusts its components.

Why Did the S&P Dow Jones Committee Choose Nvidia Over Intel?

This decision mainly underscores the importance of sector representation and stock price in the DJIA, as some analysts at S&P Dow Jones Indices highlighted. 

Nvidia shares’ remarkable recent growth, with a market capitalisation exceeding $3.3 trillion in 2024 as of Monday, 4 November, positioned it as a critical player in the tech sector and a natural fit for the index. The company became the world’s second most valuable public company, ahead of Microsoft (MSFT) but just behind Apple (AAPL). 

In contrast, Intel’s valuation has significantly declined over recent years, making its relatively low stock price (around $22.50 per share as of Monday, 4 November) less impactful within the price-weighted index.

The committee has seen a need to maintain representation within the semiconductor sector, which has become increasingly influential in the global economy. 

Including Nvidia in the DJIA reflects the continued shift towards technology-driven sectors within the index. The most recent change to the index occurred in February 2024 when Amazon (AMZN) replaced Walgreens Boots Alliance (WBA), reflecting an increased emphasis on internet and tech stocks. 

What Does Nvidia’s Entry Mean for the Dow Jones?

The Dow Jones Industrial Average differs from other major indices like Germany’s DAX 40 (FDAX) in its calculation methodology. 

While the DAX 40 index is weighted by each company's total market capitalisation, the DJIA is a price-weighted index, which means that a company’s influence on the index is determined by its share price rather than its overall market cap. 

The DJIA sums up the share prices of its 30 member companies and then applies a specific divisor, called the Dow divisor, to adjust the index’s value over time. This price-weighted characteristic gives the DJIA unique behaviours compared to market-cap-weighted indices. 

For example, Intel, whose share price has dropped by more than half this year, now has a minimal impact on the Dow. It currently holds a weighting of less than 0.5%—the lowest of all the Dow components. By contrast, higher-priced stocks can have a larger impact, even if their market caps are smaller than some other firms.

Nvidia, with a strong stock price, benefits within the Dow framework but to a lesser extent than it would in a market-cap-weighted index. If the Dow were weighted by market cap, Nvidia would account for an outsized 18% of the index. 

However, its price-weighted influence ranks it only as the 21st highest weighting, positioning it between companies like Chevron (CVX) and 3M (MMM). This results in a relatively modest influence on the index despite Nvidia’s significant market valuation.

Overall, the technology sector’s weighting in the Dow is expected to increase slightly to about 19.5% from 18.9%, yet this remains far below its approximate 58% weighting in a hypothetical market cap-based calculation. (Source: CNBC)

For traders, this structure means that changes in high-priced stocks impact the DJIA more than fluctuations in high-market-cap stocks. As of Monday, 4 November, UnitedHealth (UNH), Goldman Sachs (GS), and Microsoft are the top 3 companies with the highest stock price within the Dow index.

Conclusion

Nvidia’s entry reflects its significant market growth and the Dow’s efforts to stay aligned with economic shifts toward tech-driven industries. However, due to the Dow's price-weighted structure, Nvidia’s influence on the index is likely moderate compared to its market cap impact. 

While Nvidia’s addition slightly increases the tech sector’s presence within the index, the Dow’s methodology means that high-priced stocks like UnitedHealth and Goldman Sachs still wield more influence than some of the largest tech firms by market cap.