Bank of America Gets Booted From the Dow


The Dow Jones Industrial Average became a little less industrial today. The committee in charge of selecting its components announced this morning that Alcoa , Hewlett-Packard, and Bank of America would be replaced by Nike, Visa, and Goldman Sachs, respectively.

According to the press release announcing the move, the changes "were prompted by the low stock price of the three companies slated for removal and the Index Committee's desire to diversify the sector and industry group representation of the index."

AA Chart
AA Chart

Of the three companies, Bank of America was the most recent addition, getting listed on the index at the beginning of 2008. At the time, shares of the nation's second largest bank by assets were trading for more than $40 per share, making it one of the two largest American companies by market capitalization that weren't already on the blue-chip index.

The fortunes of the bank soon changed, though, with the onset of the financial crisis. One year after being added to the index, its shares dropped by more than 91%, all the way down to nearly $3 per share.

It was an epic collapse, matched only by the similarly dismal performance of Citigroup , which led to its own delisting from the Dow Jones Industrial Average in 2009.

"We were reluctant to remove Citigroup at the height of the financial frenzy," said Robert Thomson, managing editor of the selection committee at the time, "but it is clear that the bank is in the midst of a substantial restructuring which will see the government with a large and ongoing stake."

The question now is: What will be the impact on Bank of America's shares going forward?

The answer to this is twofold.

In the first case, there's reason to believe its shares will be less volatile, if only marginally so, as it remains a member of the more heavily tracked S&P 500. You can see this in the respective sizes of the largest exchange-traded funds following the two indexes. The SPDR S&P 500 has $136 billion in assets under management, while the SPDR Dow Jones Industrial Average has $11.7 billion in net assets.

At the same time, there's no reason to believe it will have any impact on the value of Bank of America's shares. This is first and foremost a function of Bank of America's earnings and book value. Anything else is largely noise to the committed investor.

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John Maxfield owns shares of Bank of America. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America and Citigroup. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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Originally published