Dow Shakes Things Up

Managers of the Dow Jones Industrial Average are dropping Honeywell and Altria and replacing them with Bank of America and Chevron. Knight Kiplinger, editor-in-chief of Kiplinger's Personal Finance magazine, discusses the change.

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RENEE MONTAGNE, host:

There's a big change in the Dow Jones industrial average today. We're not talking about the stock index plummeting or skyrocketing. We're talking about a change in the companies that make up the famous stock market average.

The folks in charge of the Dow are removing two companies: Honeywell, the manufacturing giant, and Altria, formerly known as Philip Morris. The Dow is replacing them with Bank of America and Chevron. The move reflects a shift away from manufacturing and more towards services and energy.

To talk about this is Knight Kiplinger. He's editor-in-chief of Kiplinger's Personal Finance magazine.

Good morning.

Mr. KNIGHT KIPLINGER (Editor-in-chief, Kiplinger's Personal Finance): Good morning, Renee.

MONTAGNE: How is the number calculated?

Mr. KIPLINGER: Well, it's very tricky. It's not just the total price of the 30 stocks. It tends to be weighted more heavily towards the higher-priced stocks in the index. And this is a criticism that some people make.

MONTAGNE: But you wonder - those of us on the outside - if the Dow only includes 30 company stocks, can it truly be considered a good indicator of how the market is doing given that there are thousands of publicly traded companies and many of them are huge corporations.

Mr. KIPLINGER: Well, that's a good point. Most people prefer the larger index of large, successful, household-name American companies, the Standard & Poor 500. That is also a selection process. Editors at McGraw Hill, Standard & Poor's put together the 500 stocks in that index. Some people prefer the 5,000 to 7,000 publicly traded stocks that are in the Wilshire 5,000 index. That is truly owning the American economy.

MONTAGNE: If the S&P 500 is really more representative than the Dow, why is the Dow mentioned so much and so prominently?

Mr. KIPLINGER: That's a good question. The S&P 500 is more representative of the broad U.S. economy, but the Dow is the oldest. The 30 stocks are easy to remember. They're all household names. It just took hold decades and decades ago, and it won't let go. And happily, the people who craft the Dow had kept it fresh and representative of the vitality of American business. And interestingly, over many years the total return of the Dow has paralleled pretty closely the total return of the broader index, the S&P 500.

MONTAGNE: And what - should we feel sorry for companies that have been kicked off the Dow?

(Soundbite of laugher)

Mr. KIPLINGER: You know, the volume of trading in these companies certainly goes down. But remember, the beauty of the Dow is that it's constantly changing. The early Dow - the 12 stocks in 1896 - had makers of sugar and coal and leather and rubber and whiskey and grain producers and things like that, a very different American economy 112 years ago.

MONTAGNE: Well, just finally, what effect does a change in the Dow components have on investors?

Mr. KIPLINGER: Well, it is generally positive for investors, because a lot of investors want to own the Dow. They own the 30 stocks of the Dow through an index mutual fund or through an exchange-traded fund. So it's beneficial to the investor that the people who craft this 30-stock index are revising it every few years. In a sense, they're watching out for the investor. It's sort of like they're managers of a mutual fund, but instead of trading different stocks each day, every few years they're changing the composition of the index the way a mutual fund manager does.

MONTAGNE: Knight Kiplinger is editor-in-chief of Kiplinger's Personal Finance magazine. Thanks very much for joining us.

Mr. KIPLINGER: Nice to be with you, Renee.

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