Google Snubbed By Dow Jones

As Canada’s Globe & Mail reports, Google wasn’t invited to join the Dow Jones Industrial Average (DJIA) when other, arguably less impressive companies were, in the first changes to the composition of the DJIA since 2004.

Here’s what the Globe & Mail says about the official statement behind the Dow’s decision not to offer Google a slot and the likely real explanation:

The official explanation from Dow Jones & Co. is that the DJIA already has enough technology exposure with stocks such as Microsoft and Intel. Tech “seems to be at about the right weight in the Dow compared to the market as a whole, so we did not make any moves in that regard at this time,” John Prestbo, editor of Dow Jones Indexes, told journalists on a conference call yesterday.

What he didn’t say was that the Dow is a price-weighted measure, meaning higher-priced stocks wield more influence than lower-priced ones. Most indexes, by contrast, are weighted by market-cap, such that larger companies hold the most sway regardless of whether their stock trades for $25, $50, or $100. This is what makes the Dow such a strange animal.

But why does this matter? Because if Google, which trades for more than $500, were allowed to join the Dow, it would immediately overwhelm all the other constituents. Even small percentage changes in the stock would cause huge swings in the average, rendering the Dow useless as a benchmark.

That’s an interesting rationale for excluding Google.