The widely followed Dow Jones Industrial Average is changing out 10% of its components, but should you care? The DJIA is dropping Alcoa (AA), Bank of America (BAC), and Hewlett-Packard (HPQ) for Visa (V), Goldman Sachs (GS), and Nike (NKE). The new additions will represent roughly 17% of the price-weighted Dow Index (as opposed to 2% for the old components). The problem is, the Dow simply isn't a very accurate depiction of the market (because it's price-weighted instead of weighted by market cap). What the Dow has going for it is popularity, particularly among the retail crowd. Despite really only being a measure of mega-cap stocks, many investors still want to know what the Dow is doing on a daily basis. One point to consider, the upcoming changes could impact the involved stocks individually because of their addition/subtraction from index tracking funds.
The hope is that ejecting 3 companies representing just 2% of the index will more equally balance the impact of all 30 index components. So for instance IBM's weighting will be cut from 9.4% to 7.9% after the new additions. In theory, this should reduce the index's volatility - but we won't know for sure until the actual changes take place starting next week.
For four companies to make up 17% of an index as opposed to 2% previously seems like a big switch and could potentially lead to greater volatility in the index which I don't think the retail crowd would be to keen on.