A closer look at the Dow, with GE out

Investing in a Dow-tracker hasn't been a disastrous bet, but better options for passive core equity exposure abound.

Karen Wallace 23 July, 2018 | 5:00PM

It's hard not to see it as the end of an era. Until last month,  General Electric (GE) was the only original Dow component left of the 30 stocks that comprise the Dow Jones Industrial Average. It was the sole remainder from a time when the Dow consisted of mostly "smokestack" companies, according this Wall Street Journal article that provides a brief look at the index's components during historical periods (subscription required).

What long-term or short-term effect, if any, its exclusion from the Dow will have on GE is unclear. Even before the announcement was made that GE would be replaced in the index by  Walgreens Boots Alliance (WBA) effective June 26, there was wide speculation that it would be removed. Though the requirements for inclusion in the Dow have always struck me as a bit fuzzy, there is a general understanding that if a firm's shares fall more than 50% over the trailing 12-month period and it cuts its dividend twice, it might be on the way out.

Some market observers, such as MarketWatch's Mark Hulbert, speculate that GE's ejection from the Dow could be the best time to buy the beleaguered stock, citing  IBM's (IBM) exclusion from the Dow from 1939 to 1979--a 40-year stretch during which IBM's stock outperformed the U.S. market.

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Karen Wallace

Karen Wallace  Karen Wallace, CFP® is Morningstar’s director of investor education.

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