Who Will Replace GM on the Dow
Friday, May 29, 2009SUZANNE PRATT: As GM heads towards bankruptcy, investors should brace for a change to the Dow Jones Industrial Average. GM is a Dow component and will be removed from the prestigious index once the company files for Chapter 11. The auto maker would be the first company removed from the Dow due to bankruptcy in nearly three decades. And as Erika Miller explains, there's plenty of speculation about which company will be invited to join the Dow 30.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: There are many exclusive clubs in the world where memberships rarely open up. What's true of the elite Metropolitan Club is also true of the Dow Jones Industrial Average. Once General Motors files for bankruptcy protection, it will kicked out of the venerable index. John Prestpo, the head of Dow Jones indexes says there are no official criteria for membership.
VOICE OF JOHN PRESTBO, EDITOR & EXEC. DIR DOW JONES INDEXES: There aren't any quantitative thresholds that we have to meet. But we do look for leading companies in their respective industries, ones that have a long track record in operations and also that are widely followed by investors.
MILLER: There is much speculation about which company will be picked to replace GM. Market strategist Nick Colas has compiled a list he calls the magnificent seven. There are Cisco Systems, Apple, Google, Oracle, Monsanto, Wells Fargo and Goldman Sachs. As for the frontrunner?
NICHOLAS COLAS, CHIEF MARKET STRATEGIST, BNY CONVERGEX GROUP: I'd have to put it even between Goldman and Cisco, as the two most likely names. I think Goldman for having financial exposure and having a big weighting if it's included. And I think Cisco, because it does have a very dominant position in its market.
MILLER: There is also the possibility that more than one Dow component could get booted from the index. Some analysts even speculate Dow Jones could expand the index to say, 50 names.
COLAS: It's really almost an ossified indicator at this point. Having 30 names represent the global economy in the same way 30 names represented the economy in the 1920s to me seems out of step.
MILLER: But even if the number stays at 30, finance Professor Kenneth Froewiss thinks the impact of a change in components will be minimal.
KENNETH FROEWISS, FINANCE PROFESSOR, NYU STERN SCHOOL OF BUSINESS: If you put in a stock that has more volatility, other things being equal, it would increase volatility of the index. But remember you have 30 stocks in there. And so the movement in any one stock is going to be somewhat muted. I wouldn't think that that is going to have a great impact.
MILLER: If GM files for bankruptcy, Dow Jones says it hopes to announce the auto maker's replacement as quickly as possible. But Dow Jones says the announcement will only be made outside of normal trading hours typically before the market opens. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
