Bank of America dropped in Dow Jones shake-up

Bank of America, Hewlett-Packard and aluminum producer Alcoa have all been cut from the Dow Jones Industrial Average in the index’s most wide-reaching changes since 2004.

From September 23 the firms will be replaced by banking giant Goldman Sachs, Nike and Visa. The S&P Dow Jones Indices Committee – a five-person group that oversees the Dow, among other indices – says it wants to remove stocks with such diminished value that they no longer contribute meaningfully to the index.

David Blitzer, committee chairman and managing director of S&P Dow Jones, says the shake-up ‘will make the Dow a better index and a better measure of what is going on in the stock markets.’

He adds: ‘Low-priced stocks have little impact. These three companies together had a weighting of 3 percent in the Dow so their impact was quite small. We had a few stocks at the top that carried a huge weight so we tried to redress that.’

The changes are not set to have a large effect on the portfolios of many institutional investors, however, as most preferentially follow the S&P 500, which is said to provide a broader representation of the market. The Dow’s members are often referred to as blue chip stocks, or as options with ‘an excellent reputation, [that] demonstrate sustained growth and [are] of interest to a large number of investors’.

The news comes as a blow to Bank of America, HP and Alcoa, however, particularly as none of the institutions was warned about the decision before it was made public. Each has seen a significant downturn in its stock value since the announcement: HP, the most valuable of the three former Dow constituents, opened at $22.07 per share on Tuesday, worth less than a third of Nike’s opening price.

‘There is no intention to pick winners, by any means,’ adds Blitzer. ‘Adding a stock or dropping a stock is not a recommendation by any means.’