Does the Dow Have Too Many Tech Stocks?

Does the Dow Have Too Many Tech Stocks?

The value of the Dow Jones Industrials as a market benchmark comes largely from the fact that the Dow isn't just an index of industrial stocks. With representation from nearly every sector of the economy, the Dow reflects the makeup of the stock market at large.

But every spot in the Dow 30 counts, and tech stocks currently take up five of those valuable spots. Is that more than the industry deserves? Let's take a closer look at how tech got to be such an important part of the Dow.

The evolution of Dow tech
Technology stocks have played a role in the Dow for a long time. Ever since IBM went beyond typewriters to build computers, technology and industrial manufacturing have gone hand in hand.

But it wasn't until the 1990s that technology really gained its place in the Dow. Hewlett-Packard joined the Dow in 1997 as part of a shift that removed several longtime Dow components, including Bethlehem Steel and Woolworth. In another example of the Dow's infamous timing, Microsoft and Intel came into the average in 1999, just before tech stocks peaked and produced big losses during the bear market from 2000 to 2002. Cisco Systems was the final tech admittee to the Dow, joining in 2009.

It's hard to fault the Dow selection committee for choosing any of these stocks at the time they joined the average. HP had already established its strength in computer peripherals and later went on to acquire IBM rival Compaq to gain a much bigger presence in the PC market, which sustained it for a decade before mobile devices started to gain ascendancy. Microsoft and Intel together redefined the PC, with Intel microprocessors powering the hardware and Microsoft providing the software that resulted in huge productivity gains for businesses around the world. Even Cisco was a major tech player when it joined the Dow, albeit having still fallen from the brief moment in history when it had the largest market capitalization of any stock in the market.

Why tech isn't ridiculously overweighted
Although five stocks are a lot for one industry to have in the Dow, the saving grace is that with the exception of IBM, their share prices are all quite modest. The four non-IBM tech stocks add up to about a 5.5% weighting in the Dow -- roughly equivalent to less than two stocks' worth of representation if the Dow were equal-weighted. IBM is the big outlier, with its nearly 10% weight giving it disproportionate influence over the Dow.

Over the years, talk has centered less on whether there are too many tech stocks in the Dow and more on whether the right ones are in the average. Yet as long as the Dow keeps its price-weighting methodology, tech stocks with triple-digit prices are unlikely candidates to replace existing tech stocks. Most likely, it'll take a transformative event for one of the five tech stocks to change tech's key presence among the Dow's 30 companies.

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Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter: @DanCaplinger. The Motley Fool recommends Intel and owns shares of Intel, IBM, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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