Apple’s Stock Split Should Remind Us How Horribly Constructed the Dow Jones Industrial Average Is

Apple’s ($AAPL: no positions) stock split serves as a simple reminder of how asinine the construction of the Dow Jones Industrial Average is.   I’ve written that post already, but just as a reminder, the Dow is a price-weighted index, which means that it “holds” the same number of shares of each stock.    That’s silly, of course – you don’t construct a portfolio like that.

Stock price is a nominal number that companies can control via splits and reverse splits.   For Dow Jones index members, however, stock splits actually matter, because they require the index to rebalance (selling some of the shares received in the split, while buying the rest of the index members).   Properly constructed indices are immune to such idiocy.

Aside:  yes: AAPL’s stock split definitely makes it a better fit for inclusion in the Dow Jones Industrial Average.   Previously, with their stock at $530, AAPL didn’t really “fit” into the index because it would have been a huge weight (because, have I mentioned how horribly constructed the index is?).

/random rant against the Dow.

-KD

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