Does the Dow Need Apple and Google?

The Dow Jones Industrial Average may be historic, but it also seems to be stuck in history. The idea that business may have changed more dramatically than the stock index gains credence when you realize that its component companies have not been updated since 2009.

While at that time including companies such as Hewlett-Packard (NYSE:HPQ) and Alcoa (NYSE:AA) made sense, the waves of business these days are directed by the hotter names of Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG). Aside from the tech giants, Berkshire Hathaway (NYSE:BRK) and Wells Fargo (NYSE:WFC) are also possible additions to the Dow if it were to go for a makeover. Berkshire’s shares, priced at $80, and Wells Fargo’s $34 stock don’t even bring the problem that adding Apple and Google might.

Featured Reading: Could This Be the Beginning of the End for Wal-Mart?>>

The Dow has a unique formula of weighing its component companies, basing it on the absolute price of their shares instead of their market value. And that would mean that Apple, which has become the world’s most valuable company, and Google will actually skew the index more than the Dow would want.

With a current stock price of around $605, Apple would account for 26 percent of the Dow’s average. IBM (NYSE:IBM) currently has the biggest weighting, with its $207 stock price giving it 12 percent. Google is planning a stock split that would cut its share price to about $300, but it would still be a substantial portion, with a 15 percent weighting.

Of course, the right way to add Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) lies in completely adjusting the way the Dow is calculated. One idea is to cap the weighting of any stock at a fixed percentage. That will ensure that while the index moves with the times, no one company’s stock will have the power of bringing about wild fluctuations to it.