Why These 3 Stocks Matter Most in the Dow

What drives the performance of the Dow Jones Industrial Average (DJIA) is quite different from how returns in the S&P 500, Nasdaq-100, and other widely followed benchmarks are determined. And it has more to do with the fact that the Dow consists of only 30 blue-chip U.S. companies.

With roots that go back to 1885, the Dow-30 uses a price-weighted method to calculate index value. Each constituent’s index weight is based on its share price. This means that its higher-priced components comprise a larger proportion of overall value while low-priced stocks matter far less. 

It is an approach that has been subject to much debate among professors and market pundits but doesn’t appear to be going anywhere.

As a result, the high-priced Dow members are highly responsible for day-to-day movements in an index value that adorns financial newspapers and websites globally. This contrasts to the S&P and Nasdaq, which employ a more modern market capitalization weighting scheme.

How Dow components rise and fall among the weighting ranks is fluid. While the list of 30 names itself changes based on various index inclusion parameters and M&A activity, stock splits are a major factor. When a Dow member decides to invoke a stock split, it effectively reduces its share price—and importance in the popular index. 

Approximately 20 months ago, Apple carried the most clout in the Dow. After a four-for-one split, what remains the S&P and Nasdaq’s top holding on account of its $2.7 trillion market cap is now the Dow’s 16th largest component.

Nowadays the Dow’s value is largely dictated by UnitedHealth Group, Goldman Sachs, and Home Depot since they command the highest share prices. So while it's debatable how much of a bellwether these companies are for the U.S. economy, in terms of where the Dow goes they have a big say.

What is the Dow’s Largest Component? 

UnitedHealth Group Incorporated (NYSE: UNH) has a $500-plus stock price which makes it the lead horse in the Dow Jones Industrial Average calculation. Its 10.2% index weighting exceeds that of the Dow’s smallest seven components combined. 

The nation’s largest health care plan provider is also a significant component of the S&P 500 but presently holds a much smaller weight at 1.4%. Apple, the Dow’s former heavyweight, now represents around 3% of the blue-chip index compared to 7% in the S&P and almost 13% in the tech-heavy Nasdaq-100.

It's not such a bad thing though that UnitedHealth is the Dow’s biggest driver. The stock has produced positive returns every year since 2009—and up 3.9% year-to-date, is outperforming this year. It is a feat that none of the other current Dow components can match. 

Granted, if UnitedHealth was to enact its first split since 2005, it would relinquish the top spot—but for now it is a worthy frontrunner.   

What May Soon Be the Dow’s Most Important Stock?

A distant second is The Goldman Sachs Group, Inc. (NYSE: GS) which has a 6% Dow weighting on account of its roughly $320 share price. The capital markets giant has never performed a stock split, so if UnitedHealth splits it could be next in line as the benchmark’s baton holder.

Goldman Sachs is a relatively minor league player in the S&P 500 where it sits at #72 in the batting order with a 0.3% weight. The company highlights the stark difference investors should be aware of when tracking the two indices. UnitedHealth and Goldman control more than 16% of the Dow’s value but less than 2% that of the S&P 500—where Apple, Microsoft, and Alphabet have a combined 16% weighting. Ditto for the market-cap weighted Nasdaq, which is similarly dominated by the three tech behemoths in addition to Amazon and Tesla. 

Down 16% year-to-date, Goldman Sachs is a big reason why the Dow has started 2022 in a 7% hole. Underperformance in high-priced Microsoft and Home Depot shares are another reason, while McDonald’s and Amgen are pulling their weight. 

What Stock is Most Responsible for the Dow Being Down?

The Home Depot, Inc.’s (NYSE: HD) $305 price tag earns it the third position in the Dow-30. It currently accounts for around 6% of the benchmark’s daily returns, while it has a much smaller impact at less than 1% of the S&P 500.

After a stellar 56% return in 2021 that was buoyed by pandemic home improvement trends, the retailer is in a major slump this year. Down 26% year-to-date, it is the single biggest detractor from the Dow’s performance. Newcomer Salesforce.com is having a worse year down more than 30%, but is less of a detractor due to its 3.3% weighting.

Now operating under new CEO Ted Decker, Home Depot has some work to do to rebuild investor confidence—and help pull the Dow higher. Earlier this year, the company announced plans to hire over 100,000 workers in time for its busy spring season, a vote of confidence in home retail spending. The move has yet to reverse the key Dow cog’s downturn, but next month’s Q1 earnings release could be a big day for the index.